hkfrs 7 financial instruments: disclosures - hong kong institute of

Financial Instruments:

Disclosures

Hong Kong Financial Reporting Standard 7

HKFRS 7 Revised December 2016September 2018

Effective for annual periods beginning on or after 1 January 2007

FINANCIAL INSTRUMENTS: DISCLOSURES

© Copyright 2 HKFRS 7 (September 2018)

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© Copyright 2018 Hong Kong Institute of Certified Public Accountants

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CONTENTS

from paragraph

INTRODUCTION IN1

HONG KONG FINANCIAL REPORTING STANDARD 7 FINANCIAL INSTRUMENTS: DISCLOSURES

OBJECTIVE 1

SCOPE 3

CLASSES OF FINANCIAL INSTRUMENTS AND LEVEL OF DISCLOSURE

6

SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR FINANCIAL POSITION AND PERFORMANCE

7

Statement of financial position 8

Categories of financial assets and financial liabilities 8

Financial assets or financial liabilities at fair value through profit or loss

9

Reclassification 12

Offsetting financial assets and financial liabilities 13A

Collateral 14

Allowance account for credit losses 16

Compound financial instruments with multiple embedded derivatives

17

Defaults and breaches 18

Statement of comprehensive income 20

Items of income, expense, gains or losses 20

Other disclosures 21

Accounting policies 21

Hedge accounting 22

Fair value 25

NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS

31

Qualitative disclosures 33

Quantitative disclosures 34

Credit risk 36

Financial assets that are either past due or impaired 37

Collateral and other credit enhancements obtained 38

Liquidity risk 39

Market risk 40

Sensitivity analysis 40

Other market risk disclosures 42


TRANSFERS OF FINANCIAL ASSETS 42A

Transferred financial assets that are not derecognised in their entirety

42D

Transferred financial assets that are derecognised in their entirety

42E

Supplementary information 42H

INITIAL APPLICATION OF IFRS 9

EFFECTIVE DATE AND TRANSITION

42I

43

WITHDRAWAL OF HKAS 30 45

APPENDICES

A Defined terms

B Application guidance

C Amendments to other HKFRSs

BASIS FOR CONCLUSIONS

Amendments to Basis for Conclusions on other IFRSs

IMPLEMENTATION GUIDANCE

Amendments to guidance on other IFRSs

Hong Kong Financial Reporting Standard 7 Financial Instruments: Disclosures (HKFRS 7) is set out in paragraphs 1-45 and Appendices A-DC. All the paragraphs have equal authority. Paragraphs in bold type state the main principles. Terms defined in Appendix A are in italics the first time they appear in the Standard. Definitions of other terms are given in the Glossary for Hong Kong Financial Reporting Standards. HKFRS 7 should be read in the context of its objective and the Basis for Conclusions, the Preface to Hong Kong Financial Reporting Standards and the Conceptual Framework for Financial Reporting. HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.


Introduction Reasons for issuing the HKFRS

IN1 In recent years, the techniques used by entities for measuring and managing

exposure to risks arising from financial instruments have evolved and new risk management concepts and approaches have gained acceptance. In addition, many public and private sector initiatives have proposed improvements to the disclosure framework for risks arising from financial instruments.

IN2 The Hong Kong Institute of Certified Public Accountants (Institute) believes that users

of financial statements need information about an entity’s exposure to risks and how those risks are managed. Such information can influence a user’s assessment of the financial position and financial performance of an entity or of the amount, timing and uncertainty of its future cash flows. Greater transparency regarding those risks allows users to make more informed judgements about risk and return.

IN3 Consequently, the Institute agreed that there was a need to revise and enhance the

disclosures in HKAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions and HKAS 32 Financial Instruments: Disclosure and Presentation. As part of this revision, the Institute removed duplicative disclosures and simplified the disclosures about concentrations of risk, credit risk, liquidity risk and market risk in HKAS 32.

Main features of the HKFRS

IN4 HKFRS 7 applies to all risks arising from all financial instruments, except those

instruments listed in paragraph 3. The HKFRS applies to all entities, including entities that have few financial instruments (eg a manufacturer whose only financial instruments are accounts receivable and accounts payable) and those that have many financial instruments (eg a financial institution most of whose assets and liabilities are financial instruments). However, the extent of disclosure required depends on the extent of the entity’s use of financial instruments and of its exposure to risk.

IN5 The HKFRS requires disclosure of:

(a) the significance of financial instruments for an entity’s financial position and performance. These disclosures incorporate many of the requirements previously in HKAS 32.

(b) qualitative and quantitative information about exposure to risks arising from

financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk. The qualitative disclosures describe management’s objectives, policies and processes for managing those risks. The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on information provided internally to the entity’s key management personnel. Together, these disclosures provide an overview of the entity’s use of financial instruments and the exposures to risks they create.

IN5A Amendments to the HKFRS, issued in March 2009, require enhanced disclosures

about fair value measurements and liquidity risk. These have been made to address application issues and provide useful information to users.

IN5B Disclosures—Transfers of Financial Assets (Amendments to HKFRS 7), issued in

October 2010, amended the required disclosures to help users of financial statements evaluate the risk exposures relating to transfers of financial assets and the effect of those risks on an entity’s financial position.


IN5C In June 2011 the HKICPA relocated the disclosures about fair value measurements to HKFRS 13 Fair Value Measurement.

IN6 The HKFRS includes in Appendix B mandatory application guidance that explains how

to apply the requirements in the HKFRS. The HKFRS is accompanied by non-mandatory Implementation Guidance that describes how an entity might provide the disclosures required by the HKFRS.

IN7 The HKFRS supersedes HKAS 30 and the disclosure requirements of HKAS 32. The

presentation requirements of HKAS 32 remain unchanged. IN8 The HKFRS is effective for annual periods beginning on or after 1 January 2007.

Earlier application is encouraged. IN9 Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to

HKFRS 7), issued in December 2011, amended the required disclosures to include information that will enable users of an entity’s financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with the entity’s recognised financial assets and recognised financial liabilities, on the entity’s financial position.


Hong Kong Financial Reporting Standard 7 Financial Instruments: Disclosures Objective 1 The objective of this HKFRS is to require entities to provide disclosures in their

financial statements that enable users to evaluate:

(a) the significance of financial instruments for the entity’s financial position and performance; and

(b) the nature and extent of risks arising from financial instruments to which the

entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks.

2 The principles in this HKFRS complement the principles for recognising, measuring

and presenting financial assets and financial liabilities in HKAS 32 Financial Instruments: Presentation and HKAS 39 HKFRS 9 Financial Instruments: Recognition and Measurement.

Scope 3 This HKFRS shall be applied by all entities to all types of financial instruments, except:

(a) those interests in subsidiaries, associates or joint ventures that are accounted for in accordance with HKFRS 10 Consolidated Financial Statements, HKAS 27 Separate Financial Statements or HKAS 28 Investments in Associates and Joint Ventures. However, in some cases, HKFRS 10, HKAS 27 or HKAS 28 require or permit an entity to account for an interest in a subsidiary, associate or joint venture using HKAS 39HKFRS 9; in those cases, entities shall apply the requirements of this HKFRS and, for those measured at fair value, the requirements of HKFRS 13 Fair Value Measurement. Entities shall also apply this HKFRS to all derivatives linked to interests in subsidiaries, associates or joint ventures unless the derivative meets the definition of an equity instrument in HKAS 32.

(b) employers’ rights and obligations arising from employee benefit plans, to

which HKAS 19 Employee Benefits applies. (c)

[deleted]

(d) insurance contracts as defined in HKFRS 4 Insurance Contracts. However,

this HKFRS applies to derivatives that are embedded in insurance contracts if HKAS 39HKFRS 9 requires the entity to account for them separately. Moreover, an issuer shall apply this HKFRS to financial guarantee contracts if the issuer applies HKAS 39HKFRS 9 in recognising and measuring the contracts, but shall apply HKFRS 4 if the issuer elects, in accordance with paragraph 4(d) of HKFRS 4, to apply HKFRS 4 in recognising and measuring them.

(e) financial instruments, contracts and obligations under share-based payment

transactions to which HKFRS 2 Share-based Payment applies, except that this HKFRS applies to contracts within the scope of paragraphs 5-7 of HKAS 39 HKFRS 9.

(f) instruments that are required to be classified as equity instruments in

accordance with paragraphs 16A and 16B or paragraphs 16C and 16D of HKAS 32.


4 This HKFRS applies to recognised and unrecognised financial instruments. Recognised financial instruments include financial assets and financial liabilities that are within the scope of HKAS 39HKFRS 9. Unrecognised financial instruments include some financial instruments that, although outside the scope of HKAS 39 HKFRS 9, are within the scope of this HKFRS (such as some loan commitments).

5 This HKFRS applies to contracts to buy or sell a non-financial item that are within the

scope of HKAS 39 (see paragraphs 5-7 of HKAS 39)HKFRS 9. 5A The credit risk disclosure requirements in paragraph 35A-35N apply to those rights

that HKFRS 15 Revenue from Contracts with Customers specifies are accounted for in accordance with HKFRS 9 for the purposes of recognising impairment gains or losses. Any reference to financial assets or financial instruments in these paragraphs shall include those rights unless otherwise specified.

Classes of financial instruments and level of disclosure

6 When this HKFRS requires disclosures by class of financial instrument, an entity shall

group financial instruments into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. An entity shall provide sufficient information to permit reconciliation to the line items presented in the statement of financial position.

Significance of financial instruments for financial position and performance

7 An entity shall disclose information that enables users of its financial statements to evaluate the significance of financial instruments for its financial position and performance.

Statement of financial position Categories of financial assets and financial liabilities

8 The carrying amounts of each of the following categories, as defined in HKAS 39specified in HKFRS 9, shall be disclosed either in the statement of financial position or in the notes:

(a) financial assets measured at fair value through profit or loss, showing

separately (i) those designated as such upon initial recognition or subsequently in accordance with paragraph 6.7.1 of HKFRS 9 and (ii) those classified as held for trading in accordance with HKAS 39; mandatorily measured at fair value through profit or loss in accordance with HKFRS 9.

(b)-(d) held-to-maturity investments; [deleted]

(c) loans and receivables; (d) available-for-sale financial assets;

(e) financial liabilities at fair value through profit or loss, showing separately (i) those designated as such upon initial recognition or subsequently in accordance with paragraph 6.7.1 of HKFRS 9 and (ii) those classified asthat meet the definition of held for trading in accordance with HKAS 39; andHKFRS 9.

(f) financial liabilities assets measured at amortised cost. (g) financial liabilities measured at amortised cost.


(h) financial assets measured at fair value through other comprehensive income,

showing separately (i) financial assets that are measured at fair value through other comprehensive income in accordance with paragraph 4.1.2A of HKFRS 9; and (ii) investments in equity instruments designated as such upon initial recognition in accordance with paragraph 5.7.5 of HKFRS 9.


9 If the entity has designated a loan or receivableas measured at fair value through profit or loss a financial asset (or group of loans or receivables financial assets) as at fair value through profit or loss that would otherwise be measured at fair value through other comprehensive income or amortised cost, it shall disclose:

(a) the maximum exposure to credit risk (see paragraph 36(a)) of the loan or

receivable financial asset (or group of loans or receivables financial assets) at the end of the reporting period.

(b) the amount by which any related credit derivatives or similar instruments

mitigate that maximum exposure to credit risk (see paragraph 36(b)). (c) the amount of change, during the period and cumulatively, in the fair value of

the loan or receivable financial asset (or group of loans or receivables financial assets) that is attributable to changes in the credit risk of the financial asset determined either:

(i) as the amount of change in its fair value that is not attributable to

changes in market conditions that give rise to market risk; or (ii) using an alternative method the entity believes more faithfully

represents the amount of change in its fair value that is attributable to changes in the credit risk of the asset.

Changes in market conditions that give rise to market risk include changes in an observed (benchmark) interest rate, commodity price, foreign exchange rate or index of prices or rates.

(d) the amount of the change in the fair value of any related credit derivatives or

similar instruments that has occurred during the period and cumulatively since the loan or receivable financial asset was designated.

10 If the entity has designated a financial liability as at fair value through profit or loss in

accordance with paragraph 9 of HKAS 39 4.2.2 of HKFRS 9 and is required to present the effects of changes in that liability's credit risk in other comprehensive income (see paragraph 5.7.7 of HKFRS 9), it shall disclose:

(a) the amount of change, during the period and cumulatively, in the fair value of

the financial liability that is attributable to changes in the credit risk of that liability determined either:(see paragraphs B5.7.13-B5.7.20 of HKFRS 9 for guidance on determining the effects of changes in a liability's credit risk).

(i) as the amount of change in its fair value that is not attributable to

changes in market conditions that give rise to market risk (see Appendix B, paragraph B4); or

(ii) using an alternative method the entity believes more faithfully

represents the amount of change in its fair value that is attributable to changes in the credit risk of the liability.

(b) the difference between the financial liability’s carrying amount and the amount

the entity would be contractually required to pay at maturity to the holder of the obligation.


(c) any transfers of the cumulative gain or loss within equity during the period

including the reason for such transfers. (d) if a liability is derecognised during the period, the amount (if any) presented in

other comprehensive income that was realised at derecognition. 10A If an entity has designated a financial liability as at fair value through profit or loss in

accordance with paragraph 4.2.2 of HKFRS 9 and is required to present all changes in the fair value of that liability (including the effects of changes in the credit risk of the liability) in profit or loss (see paragraphs 5.7.7 and 5.7.8 of HKFRS 9), it shall disclose:

(a) the amount of change, during the period and cumulatively, in the fair value of

the financial liability that is attributable to changes in the credit risk of that liability (see paragraphs B5.7.13-B5.7.20 of HKFRS 9 for guidance on determining the effects of changes in a liability's credit risk); and

(b) the difference between the financial liability's carrying amount and the amount the entity would be contractually required to pay at maturity to the holder of the obligation.

11 The entity shall also disclose:

(a) a detailed description of the methods used to comply with the requirements in paragraphs 9(c) and ,10(a) and 10A(a) and paragraph 5.7.7(a) of HKFRS 9, including an explanation of why the method is appropriate.

(b) if the entity believes that the disclosure it has given, either in the statement of

financial position or in the notes, to comply with the requirements in paragraph 9(c) or, 10(a) or 10A(a) or paragraph 5.7.7(a) of HKFRS 9 does not faithfully represent the change in the fair value of the financial asset or financial liability attributable to changes in its credit risk, the reasons for reaching this conclusion and the factors it believes are relevant.

(c) a detailed description of the methodology or methodologies used to determine

whether presenting the effects of changes in a liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss (see paragraphs 5.7.7 and 5.7.8 of HKFRS 9). If an entity is required to present the effects of changes in a liability's credit risk in profit or loss (see paragraphs 5.7.8 of HKFRS 9), the disclosure must include a detailed description of the economic relationship described in paragraph B5.7.6 of HKFRS 9.

Investments in equity instruments designated at fair value through other

comprehensive income 11A If an entity has designated investments in equity instruments to be measured at fair

value through other comprehensive income, as permitted by paragraph 5.7.5 of HKFRS 9, it shall disclose:

(a) which investments in equity instruments have been designated to be

measured at fair value through other comprehensive income. (b) the reasons for using this presentation alternative. (c) the fair value of each such investment at the end of the reporting period. (d) dividends recognised during the period, showing separately those related to

investments derecognised during the reporting period and those related to investments held at the end of the reporting period.

(e) any transfers of the cumulative gain or loss within equity during the period

including the reason for such transfers.


11B If an entity derecognised investments in equity instruments measured at fair value

through other comprehensive income during the reporting period, it shall disclose: (a) the reasons for disposing of the investments. (b) the fair value of the investments at the date of derecognition. (c) the cumulative gain or loss on disposal.

Reclassification

12-12A [Deleted]If the entity has reclassified a financial asset (in accordance with paragraphs 51-54 of HKAS 39) as one measured:

(a) at cost or amortised cost, rather than fair value; or

(b) at fair value, rather than at cost or amortised cost,

it shall disclose the amount reclassified into and out of each category and the reason for that reclassification.

12A If the entity has reclassified a financial asset out of the fair value through profit or loss category in accordance with paragraph 50B or 50D of HKAS 39 or out of the available-for-sale category in accordance with paragraph 50E of HKAS 39, it shall disclose:

(a) the amount reclassified into and out of each category; (b) for each reporting period until derecognition, the carrying amounts and fair

values of all financial assets that have been reclassified in the current and previous reporting periods;

(c) if a financial asset was reclassified in accordance with paragraph 50B, the rare

situation, and the facts and circumstances indicating that the situation was rare;

(d) for the reporting period when the financial asset was reclassified, the fair value

gain or loss on the financial asset recognised in profit or loss or other comprehensive income in that reporting period and in the previous reporting period;

(e) for each reporting period following the reclassification (including the reporting

period in which the financial asset was reclassified) until derecognition of the financial asset, the fair value gain or loss that would have been recognised in profit or loss or other comprehensive income if the financial asset had not been reclassified, and the gain, loss, income and expense recognised in profit or loss; and

(f) the effective interest rate and estimated amounts of cash flows the entity

expects to recover, as at the date of reclassification of the financial asset.

12B An entity shall disclose if, in the current or previous reporting periods, it has reclassified any financial assets in accordance with paragraph 4.4.1 of HKFRS 9. For each such event, an entity shall disclose:

(a) the date of reclassification. (b) a detailed explanation of the change in business model and a qualitative

description of its effect on the entity's financial statements.


(c) the amount reclassified into and out of each category.

12C For each reporting period following reclassification until derecognition, an entity shall disclose for assets reclassified out of the fair value through profit or loss category so that they are measured at amortised cost or fair value through other comprehensive income in accordance with paragraph 4.4.1 of HKFRS 9:

(a) the effective interest rate determined on the date of reclassification; and (b) the interest revenue recognised.

12D If, since its last annual reporting date, an entity has reclassified financial assets out of

the fair value through other comprehensive income category so that they are measured at amortised cost or out of the fair value through profit or loss category so that they are measured at amortised cost or fair value through other comprehensive income it shall disclose:

(a) the fair value of the financial assets at the end of the reporting period; and (b) the fair value gain or loss that would have been recognised in profit or loss or

other comprehensive income during the reporting period if the financial assets had not been reclassified.

13 [Deleted]

Offsetting financial assets and financial liabilities 13A The disclosures in paragraphs 13B–13E supplement the other disclosure

requirements of this HKFRS and are required for all recognised financial instruments that are set off in accordance with paragraph 42 of HKAS 32. These disclosures also apply to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with paragraph 42 of HKAS 32.

13B An entity shall disclose information to enable users of its financial statements to

evaluate the effect or potential effect of netting arrangements on the entity’s financial position. This includes the effect or potential effect of rights of set-off associated with the entity’s recognised financial assets and recognised financial liabilities that are within the scope of paragraph 13A.

13C To meet the objective in paragraph 13B, an entity shall disclose, at the end of the

reporting period, the following quantitative information separately for recognised financial assets and recognised financial liabilities that are within the scope of paragraph 13A:

(a) the gross amounts of those recognised financial assets and recognised

financial liabilities; (b) the amounts that are set off in accordance with the criteria in paragraph 42 of

HKAS 32 when determining the net amounts presented in the statement of financial position;

(c) the net amounts presented in the statement of financial position; (d) the amounts subject to an enforceable master netting arrangement or similar

agreement that are not otherwise included in paragraph 13C(b), including: (i) amounts related to recognised financial instruments that do not meet

some or all of the offsetting criteria in paragraph 42 of HKAS 32; and


(ii) amounts related to financial collateral (including cash collateral); and

(e) the net amount after deducting the amounts in (d) from the amounts in (c)

above. The information required by this paragraph shall be presented in a tabular format, separately for financial assets and financial liabilities, unless another format is more appropriate.

13D The total amount disclosed in accordance with paragraph 13C(d) for an instrument

shall be limited to the amount in paragraph 13C(c) for that instrument. 13E An entity shall include a description in the disclosures of the rights of set-off

associated with the entity’s recognised financial assets and recognised financial liabilities subject to enforceable master netting arrangements and similar agreements that are disclosed in accordance with paragraph 13C(d), including the nature of those rights.

13F If the information required by paragraphs 13B–13E is disclosed in more than one note

to the financial statements, an entity shall cross-refer between those notes. Collateral

14 An entity shall disclose:

(a) the carrying amount of financial assets it has pledged as collateral for liabilities or contingent liabilities, including amounts that have been reclassified in accordance with paragraph 37(a) of HKAS 393.2.23(a) of HKFRS 9; and

(b) the terms and conditions relating to its pledge.

15 When an entity holds collateral (of financial or non-financial assets) and is permitted to

sell or repledge the collateral in the absence of default by the owner of the collateral, it shall disclose:

(a) the fair value of the collateral held; (b) the fair value of any such collateral sold or repledged, and whether the entity

has an obligation to return it; and (c) the terms and conditions associated with its use of the collateral.

Allowance account for credit losses 16 When financial assets are impaired by credit losses and the entity records the

impairment in a separate account (eg an allowance account used to record individual impairments or a similar account used to record a collective impairment of assets) rather than directly reducing the carrying amount of the asset, it shall disclose a reconciliation of changes in that account during the period for each class of financial assets.[Deleted]

16A The carrying amount of financial assets measured at fair value through other

comprehensive income in accordance with paragraph 4.1.2A of HKFRS 9 is not reduced by a loss allowance and an entity shall not present the loss allowance separately in the statement of financial position as a reduction of the carrying amount of the financial asset. However, an entity shall disclose the loss allowance in the notes to the financial statements.


Compound financial instruments with multiple embedded derivatives 17 If an entity has issued an instrument that contains both a liability and an equity

component (see paragraph 28 of HKAS 32) and the instrument has multiple embedded derivatives whose values are interdependent (such as a callable convertible debt instrument), it shall disclose the existence of those features.

Defaults and breaches 18 For loans payable recognised at the end of the reporting period, an entity shall

disclose:

(a) details of any defaults during the period of principal, interest, sinking fund, or redemption terms of those loans payable;

(b) the carrying amount of the loans payable in default at the end of the reporting

period; and (c) whether the default was remedied, or the terms of the loans payable were

renegotiated, before the financial statements were authorised for issue. 19 If, during the period, there were breaches of loan agreement terms other than those

described in paragraph 18, an entity shall disclose the same information as required by paragraph 18 if those breaches permitted the lender to demand accelerated repayment (unless the breaches were remedied, or the terms of the loan were renegotiated, on or before the end of the reporting period).

Statement of comprehensive income Items of income, expense, gains or losses

20 An entity shall disclose the following items of income, expense, gains or losses either in the statement of comprehensive income or in the notes:

(a) net gains or net losses on:

(i) financial assets or financial liabilities at fair value through profit or loss,

showing separately those on financial assets or financial liabilities designated as such upon initial recognition or subsequently in accordance with paragraph 6.7.1 of HKFRS 9, and those on financial assets or financial liabilities that are mandatorily measured at fair value through profit or loss in accordance with HKFRS 9 (eg financial liabilities that meet the definition of classified as held for trading in accordance with HKAS 39;HKFRS 9). For financial liabilities designated as at fair value through profit or loss, an entity shall show separately the amount of gain or loss recognised in other comprehensive income and the amount recognised in profit or loss.

(ii)-(iv) [deleted]available-for-sale financial assets, showing separately the

amount of gain or loss recognised in other comprehensive income during the period and the amount reclassified from equity to profit or loss for the period;

(iii) held-to-maturity investments; (iv) loans and receivables; and (v) financial liabilities measured at amortised cost;. (vi) financial assets measured at amortised cost. (vii) investments in equity instruments designated at fair value through

other comprehensive income in accordance with paragraph 5.7.5 of


HKFRS 9. (viii) financial assets measured at fair value through other comprehensive

income in accordance with paragraph 4.1.2A of HKFRS 9, showing separately the amount of gain or loss recognised in other comprehensive income during the period and the amount reclassified upon derecognition from accumulated other comprehensive income to profit or loss for the period.

(b) total interest income revenue and total interest expense (calculated using the

effective interest method) for financial assets that are measured at amortised cost or that are measured at fair value through other comprehensive income in accordance with paragraph 4.1.2A of HKFRS 9 (showing these amounts separately); or financial liabilities that are not measured at fair value through profit or loss;.

(c) fee income and expense (other than amounts included in determining the

effective interest rate) arising from:

(i) financial assets orand financial liabilities that are not at fair value through profit or loss; and

(ii) trust and other fiduciary activities that result in the holding or investing

of assets on behalf of individuals, trusts, retirement benefit plans, and other institutions;.

(d) interest income on impaired financial assets accrued in accordance with

paragraph AG93 of HKAS 39; and[deleted] (e) the amount of any impairment loss for each class of financial asset.[deleted]

20A An entity shall disclose an analysis of the gain or loss recognised in the statement of

comprehensive income arising from the derecognition of financial assets measured at amortised cost, showing separately gains and losses arising from derecognition of those financial assets. This disclosure shall include the reasons for derecognising those financial assets.

Other disclosures

Accounting policies

21 In accordance with paragraph 117 of HKAS 1 Presentation of Financial Statements

(as revised 2007), an entity discloses its significant accounting policies comprising the measurement basis (or bases) used in preparing the financial statements and the other accounting policies used that are relevant to an understanding of the financial statements.

Hedge accounting

21A An entity shall apply the disclosure requirements in paragraphs 21B–24F for those risk exposures that an entity hedges and for which it elects to apply hedge accounting. Hedge accounting disclosures shall provide information about:

(a) an entity’s risk management strategy and how it is applied to manage risk; (b) how the entity’s hedging activities may affect the amount, timing and

uncertainty of its future cash flows; and

(c) the effect that hedge accounting has had on the entity’s statement of financial position, statement of comprehensive income and statement of changes in


equity. 21B An entity shall present the required disclosures in a single note or separate section in

its financial statements. However, an entity need not duplicate information that is already presented elsewhere, provided that the information is incorporated by cross-reference from the financial statements to some other statement, such as a management commentary or risk report, that is available to users of the financial statements on the same terms as the financial statements and at the same time. Without the information incorporated by cross-reference, the financial statements are incomplete.

21C When paragraphs 22A–24F require the entity to separate by risk category the

information disclosed, the entity shall determine each risk category on the basis of the risk exposures an entity decides to hedge and for which hedge accounting is applied. An entity shall determine risk categories consistently for all hedge accounting disclosures.

21D To meet the objectives in paragraph 21A, an entity shall (except as otherwise

specified below) determine how much detail to disclose, how much emphasis to place on different aspects of the disclosure requirements, the appropriate level of aggregation or disaggregation, and whether users of financial statements need additional explanations to evaluate the quantitative information disclosed. However, an entity shall use the same level of aggregation or disaggregation it uses for disclosure requirements of related information in this HKFRS and HKFRS 13 Fair Value Measurement.

The risk management strategy

22 [Deleted]An entity shall disclose the following separately for each type of hedge described in HKAS 39 (ie fair value hedges, cash flow hedges, and hedges of net investments in foreign operations): (a) a description of each type of hedge; (b) a description of the financial instruments designated as hedging instruments

and their fair values at the end of the reporting period; and (c) the nature of the risks being hedged.

22A An entity shall explain its risk management strategy for each risk category of risk

exposures that it decides to hedge and for which hedge accounting is applied. This explanation should enable users of financial statements to evaluate (for example):

(a) how each risk arises. (b) how the entity manages each risk; this includes whether the entity hedges an

item in its entirety for all risks or hedges a risk component (or components) of an item and why.

(c) the extent of risk exposures that the entity manages.

22B To meet the requirements in paragraph 22A, the information should include (but is not

limited to) a description of:

(a) the hedging instruments that are used (and how they are used) to hedge risk exposures;

(b) how the entity determines the economic relationship between the hedged item

and the hedging instrument for the purpose of assessing hedge effectiveness; and


(c) how the entity establishes the hedge ratio and what the sources of hedge ineffectiveness are.

22C When an entity designates a specific risk component as a hedged item (see paragraph

6.3.7 of HKFRS 9) it shall provide, in addition to the disclosures required by paragraphs 22A and 22B, qualitative or quantitative information about:

(a) how the entity determined the risk component that is designated as the

hedged item (including a description of the nature of the relationship between the risk component and the item as a whole); and

(b) how the risk component relates to the item in its entirety (for example, the

designated risk component historically covered on average 80 per cent of the changes in fair value of the item as a whole).

The amount, timing and uncertainty of future cash flows

23 [Deleted]For cash flow hedges, an entity shall disclose:

(a) the periods when the cash flows are expected to occur and when they are expected to affect profit or loss;

(b) a description of any forecast transaction for which hedge accounting had

previously been used, but which is no longer expected to occur; (c) the amount that was recognised in other comprehensive income during the

period; (d) the amount that was reclassified from equity to profit or loss for the period,

showing the amount included in each line item in the statement of comprehensive income; and

(e) the amount that was removed from equity during the period and included in

the initial cost or other carrying amount of a non-financial asset or non-financial liability whose acquisition or incurrence was a hedged highly probable forecast transaction.

23A Unless exempted by paragraph 23C, an entity shall disclose by risk category

quantitative information to allow users of its financial statements to evaluate the terms and conditions of hedging instruments and how they affect the amount, timing and uncertainty of future cash flows of the entity.

23B To meet the requirement in paragraph 23A, an entity shall provide a breakdown that

discloses:

(a) a profile of the timing of the nominal amount of the hedging instrument; and (b) if applicable, the average price or rate (for example strike or forward prices etc)

of the hedging instrument. 23C In situations in which an entity frequently resets (ie discontinues and restarts) hedging

relationships because both the hedging instrument and the hedged item frequently change (ie the entity uses a dynamic process in which both the exposure and the hedging instruments used to manage that exposure do not remain the same for long—such as in the example in paragraph B6.5.24(b) of HKFRS 9) the entity:

(a) is exempt from providing the disclosures required by paragraphs 23A and

23B. (b) shall disclose:


(i) information about what the ultimate risk management strategy is in relation to those hedging relationships;

(ii) a description of how it reflects its risk management strategy by using

hedge accounting and designating those particular hedging relationships; and

(iii) an indication of how frequently the hedging relationships are

discontinued and restarted as part of the entity’s process in relation to those hedging relationships.

23D An entity shall disclose by risk category a description of the sources of hedge

ineffectiveness that are expected to affect the hedging relationship during its term. 23E If other sources of hedge ineffectiveness emerge in a hedging relationship, an entity

shall disclose those sources by risk category and explain the resulting hedge ineffectiveness.

23F For cash flow hedges, an entity shall disclose a description of any forecast transaction

for which hedge accounting had been used in the previous period, but which is no longer expected to occur.

The effects of hedge accounting on financial position and performance 24 [Deleted]An entity shall disclose separately:

(a) in fair value hedges, gains or losses:

(i) on the hedging instrument; and (ii) on the hedged item attributable to the hedged risk.

(b) the ineffectiveness recognised in profit or loss that arises from cash flow

hedges. (c) the ineffectiveness recognised in profit or loss that arises from hedges of net

investments in foreign operations. 24A An entity shall disclose, in a tabular format, the following amounts related to items

designated as hedging instruments separately by risk category for each type of hedge (fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation):

(a) the carrying amount of the hedging instruments (financial assets separately

from financial liabilities); (b) the line item in the statement of financial position that includes the hedging

instrument; (c) the change in fair value of the hedging instrument used as the basis for

recognising hedge ineffectiveness for the period; and (d) the nominal amounts (including quantities such as tonnes or cubic metres) of

the hedging instruments. 24B An entity shall disclose, in a tabular format, the following amounts related to hedged

items separately by risk category for the types of hedges as follows:

(a) for fair value hedges:


(i) the carrying amount of the hedged item recognised in the statement of financial position (presenting assets separately from liabilities);

(ii) the accumulated amount of fair value hedge adjustments on the

hedged item included in the carrying amount of the hedged item recognised in the statement of financial position (presenting assets separately from liabilities);

(iii) the line item in the statement of financial position that includes the

hedged item; (iv) the change in value of the hedged item used as the basis for

recognising hedge ineffectiveness for the period; and (v) the accumulated amount of fair value hedge adjustments remaining in

the statement of financial position for any hedged items that have ceased to be adjusted for hedging gains and losses in accordance with paragraph 6.5.10 of HKFRS 9.

(b) for cash flow hedges and hedges of a net investment in a foreign operation:

(i) the change in value of the hedged item used as the basis for

recognising hedge ineffectiveness for the period (ie for cash flow hedges the change in value used to determine the recognised hedge ineffectiveness in accordance with paragraph 6.5.11(c) of HKFRS 9);

(ii) the balances in the cash flow hedge reserve and the foreign currency

translation reserve for continuing hedges that are accounted for in accordance with paragraphs 6.5.11 and 6.5.13(a) of HKFRS 9; and

(iii) the balances remaining in the cash flow hedge reserve and the

foreign currency translation reserve from any hedging relationships for which hedge accounting is no longer applied.

24C An entity shall disclose, in a tabular format, the following amounts separately by risk

category for the types of hedges as follows:

(a) for fair value hedges:

(i) hedge ineffectiveness—ie the difference between the hedging gains or losses of the hedging instrument and the hedged item—recognised in profit or loss (or other comprehensive income for hedges of an equity instrument for which an entity has elected to present changes in fair value in other comprehensive income in accordance with paragraph 5.7.5 of HKFRS 9); and

(ii) the line item in the statement of comprehensive income that includes

the recognised hedge ineffectiveness.

(b) for cash flow hedges and hedges of a net investment in a foreign operation:

(i) hedging gains or losses of the reporting period that were recognised in other comprehensive income;

(ii) hedge ineffectiveness recognised in profit or loss; (iii) the line item in the statement of comprehensive income that includes

the recognised hedge ineffectiveness; (iv) the amount reclassified from the cash flow hedge reserve or the


foreign currency translation reserve into profit or loss as a reclassification adjustment (see HKAS 1) (differentiating between amounts for which hedge accounting had previously been used, but for which the hedged future cash flows are no longer expected to occur, and amounts that have been transferred because the hedged item has affected profit or loss);

(v) the line item in the statement of comprehensive income that includes

the reclassification adjustment (see HKAS 1); and (vi) for hedges of net positions, the hedging gains or losses recognised in

a separate line item in the statement of comprehensive income (see paragraph 6.6.4 of HKFRS 9).

24D When the volume of hedging relationships to which the exemption in paragraph 23C

applies is unrepresentative of normal volumes during the period (ie the volume at the reporting date does not reflect the volumes during the period) an entity shall disclose that fact and the reason it believes the volumes are unrepresentative.

24E An entity shall provide a reconciliation of each component of equity and an analysis of

other comprehensive income in accordance with HKAS 1 that, taken together:

(a) differentiates, at a minimum, between the amounts that relate to the disclosures in paragraph 24C(b)(i) and (b)(iv) as well as the amounts accounted for in accordance with paragraph 6.5.11(d)(i) and (d)(iii) of HKFRS 9;

(b) differentiates between the amounts associated with the time value of options

that hedge transaction related hedged items and the amounts associated with the time value of options that hedge time-period related hedged items when an entity accounts for the time value of an option in accordance with paragraph 6.5.15 of HKFRS 9; and

(c) differentiates between the amounts associated with forward elements of

forward contracts and the foreign currency basis spreads of financial instruments that hedge transaction related hedged items, and the amounts associated with forward elements of forward contracts and the foreign currency basis spreads of financial instruments that hedge time-period related hedged items when an entity accounts for those amounts in accordance with paragraph 6.5.16 of HKFRS 9.

24F An entity shall disclose the information required in paragraph 24E separately by risk

category. This disaggregation by risk may be provided in the notes to the financial statements.

Option to designate a credit exposure as measured at fair value through profit or Loss

24G If an entity designated a financial instrument, or a proportion of it, as measured at fair

value through profit or loss because it uses a credit derivative to manage the credit risk of that financial instrument it shall disclose:

(a) for credit derivatives that have been used to manage the credit risk of financial

instruments designated as measured at fair value through profit or loss in accordance with paragraph 6.7.1 of HKFRS 9, a reconciliation of each of the nominal amount and the fair value at the beginning and at the end of the period;

(b) the gain or loss recognised in profit or loss on designation of a financial

instrument, or a proportion of it, as measured at fair value through profit or loss in accordance with paragraph 6.7.1 of HKFRS 9; and


(c) on discontinuation of measuring a financial instrument, or a proportion of it, at

fair value through profit or loss, that financial instrument’s fair value that has become the new carrying amount in accordance with paragraph 6.7.4 of HKFRS 9 and the related nominal or principal amount (except for providing comparative information in accordance with HKAS 1, an entity does not need to continue this disclosure in subsequent periods).

Fair value

25 Except as set out in paragraph 29, for each class of financial assets and financial liabilities (see paragraph 6), an entity shall disclose the fair value of that class of assets and liabilities in a way that permits it to be compared with its carrying amount.

26 In disclosing fair values, an entity shall group financial assets and financial liabilities

into classes, but shall offset them only to the extent that their carrying amounts are offset in the statement of financial position.

27-27B [Deleted] 28 In some cases, an entity does not recognise a gain or loss on initial recognition of a

financial asset or financial liability because the fair value is neither evidenced by a quoted price in an active market for an identical asset or liability (ie a Level 1 input) nor based on a valuation technique that uses only data from observable markets (see paragraph AG76 of HKAS 39B5.1.2A of HKFRS 9). In such cases, the entity shall disclose by class of financial asset or financial liability.:

(a) its accounting policy for recognising in profit or loss the difference between the

fair value at initial recognition and the transaction price to reflect a change in factors (including time) that market participants would take into account when pricing the asset or liability (see paragraph AG76(b) of HKAS 39B5.1.2A(b) of HKFRS 9).

(b) the aggregate difference yet to be recognised in profit or loss at the beginning

and end of the period and a reconciliation of changes in the balance of this difference.

(c) why the entity concluded that the transaction price was not the best evidence

of fair value, including a description of the evidence that supports the fair value.

29 Disclosures of fair value are not required:

(a) when the carrying amount is a reasonable approximation of fair value, for example, for financial instruments such as short-term trade receivables and payables;

(b) for an investment in equity instruments that do not have a quoted market price

in an active market for an identical instrument (ie a Level 1 input), or derivatives linked to such equity instruments, that is measured at cost in accordance with HKAS 39 because its fair value cannot otherwise be measured reliably; or[deleted]

(c) for a contract containing a discretionary participation feature (as described in

HKFRS 4) if the fair value of that feature cannot be measured reliably. 30 In the cases described in paragraph 29(b) and (c), an entity shall disclose information

to help users of the financial statements make their own judgements about the extent of possible differences between the carrying amount of those financial assets or financial liabilities contracts and their fair value, including:


(a) the fact that fair value information has not been disclosed for these

instruments because their fair value cannot be measured reliably; (b) a description of the financial instruments, their carrying amount, and an

explanation of why fair value cannot be measured reliably; (c) information about the market for the instruments; (d) information about whether and how the entity intends to dispose of the

financial instruments; and (e) if financial instruments whose fair value previously could not be reliably

measured are derecognised, that fact, their carrying amount at the time of derecognition, and the amount of gain or loss recognised.

Nature and extent of risks arising from financial instruments 31 An entity shall disclose information that enables users of its financial

statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period.

32 The disclosures required by paragraphs 33-42 focus on the risks that arise from

financial instruments and how they have been managed. These risks typically include, but are not limited to, credit risk, liquidity risk and market risk.

32A Providing qualitative disclosures in the context of quantitative disclosures enables

users to link related disclosures and hence form an overall picture of the nature and extent of risks arising from financial instruments. The interaction between qualitative and quantitative disclosures contributes to disclosure of information in a way that better enables users to evaluate an entity’s exposure to risks.

Qualitative disclosures

33 For each type of risk arising from financial instruments, an entity shall disclose:

(a) the exposures to risk and how they arise; (b) its objectives, policies and processes for managing the risk and the methods

used to measure the risk; and (c) any changes in (a) or (b) from the previous period.

Quantitative disclosures

34 For each type of risk arising from financial instruments, an entity shall disclose:

(a) summary quantitative data about its exposure to that risk at the end of the reporting period. This disclosure shall be based on the information provided internally to key management personnel of the entity (as defined in HKAS 24 Related Party Disclosures), for example the entity’s board of directors or chief executive officer.

(b) the disclosures required by paragraphs 3635A-42, to the extent not provided

in accordance with (a). (c) concentrations of risk if not apparent from the disclosures made in accordance

with (a) and (b).


35 If the quantitative data disclosed as at the end of the reporting period are unrepresentative of an entity’s exposure to risk during the period, an entity shall provide further information that is representative.

Credit risk

Scope and objectives

35A An entity shall apply the disclosure requirements in paragraphs 35F–35N to financial

instruments to which the impairment requirements in HKFRS 9 are applied. However:

(a) for trade receivables, contract assets and lease receivables, paragraph 35J(a) applies to those trade receivables, contract assets or lease receivables on which lifetime expected credit losses are recognised in accordance with paragraph 5.5.15 of HKFRS 9, if those financial assets are modified while more than 30 days past due; and

(b) paragraph 35K(b) does not apply to lease receivables.

35B The credit risk disclosures made in accordance with paragraphs 35F–35N shall enable

users of financial statements to understand the effect of credit risk on the amount, timing and uncertainty of future cash flows. To achieve this objective, credit risk disclosures shall provide:

(a) information about an entity’s credit risk management practices and how they

relate to the recognition and measurement of expected credit losses, including the methods, assumptions and information used to measure expected credit losses;

(b) quantitative and qualitative information that allows users of financial

statements to evaluate the amounts in the financial statements arising from expected credit losses, including changes in the amount of expected credit losses and the reasons for those changes; and

(c) information about an entity’s credit risk exposure (ie the credit risk inherent in

an entity’s financial assets and commitments to extend credit) including significant credit risk concentrations.

35C An entity need not duplicate information that is already presented elsewhere, provided

that the information is incorporated by cross-reference from the financial statements to other statements, such as a management commentary or risk report that is available to users of the financial statements on the same terms as the financial statements and at the same time. Without the information incorporated by cross-reference, the financial statements are incomplete.

35D To meet the objectives in paragraph 35B, an entity shall (except as otherwise

specified) consider how much detail to disclose, how much emphasis to place on different aspects of the disclosure requirements, the appropriate level of aggregation or disaggregation, and whether users of financial statements need additional explanations to evaluate the quantitative information disclosed.

35E If the disclosures provided in accordance with paragraphs 35F–35N are insufficient to meet the objectives in paragraph 35B, an entity shall disclose additional information that is necessary to meet those objectives.

The credit risk management practices

35F An entity shall explain its credit risk management practices and how they relate to the

recognition and measurement of expected credit losses. To meet this objective an entity shall disclose information that enables users of financial statements to understand and evaluate:


(a) how an entity determined whether the credit risk of financial instruments has

increased significantly since initial recognition, including, if and how:

(i) financial instruments are considered to have low credit risk in accordance with paragraph 5.5.10 of HKFRS 9, including the classes of financial instruments to which it applies; and

(ii) the presumption in paragraph 5.5.11 of HKFRS 9, that there have

been significant increases in credit risk since initial recognition when financial assets are more than 30 days past due, has been rebutted;

(b) an entity’s definitions of default, including the reasons for selecting those

definitions;

(c) how the instruments were grouped if expected credit losses were measured on a collective basis;

(d) how an entity determined that financial assets are credit-impaired financial

assets; (e) an entity’s write-off policy, including the indicators that there is no reasonable

expectation of recovery and information about the policy for financial assets that are written-off but are still subject to enforcement activity; and

(f) how the requirements in paragraph 5.5.12 of HKFRS 9 for the modification of

contractual cash flows of financial assets have been applied, including how an entity:

(i) determines whether the credit risk on a financial asset that has been

modified while the loss allowance was measured at an amount equal to lifetime expected credit losses, has improved to the extent that the loss allowance reverts to being measured at an amount equal to 12-month expected credit losses in accordance with paragraph 5.5.5 of HKFRS 9; and

(ii) monitors the extent to which the loss allowance on financial assets

meeting the criteria in (i) is subsequently remeasured at an amount equal to lifetime expected credit losses in accordance with paragraph 5.5.3 of HKFRS 9.

35G An entity shall explain the inputs, assumptions and estimation techniques used to

apply the requirements in Section 5.5 of HKFRS 9. For this purpose an entity shall disclose:

(a) the basis of inputs and assumptions and the estimation techniques used to:

(i) measure the 12-month and lifetime expected credit losses; (ii) determine whether the credit risk of financial instruments has

increased significantly since initial recognition; and

(iii) determine whether a financial asset is a credit-impaired financial asset.

(b) how forward-looking information has been incorporated into the determination of expected credit losses, including the use of macroeconomic information; and

(c) changes in the estimation techniques or significant assumptions made during


the reporting period and the reasons for those changes.

Quantitative and qualitative information about amounts arising from expected credit losses

35H To explain the changes in the loss allowance and the reasons for those changes, an

entity shall provide, by class of financial instrument, a reconciliation from the opening balance to the closing balance of the loss allowance, in a table, showing separately the changes during the period for:

(a) the loss allowance measured at an amount equal to 12-month expected credit

losses; (b) the loss allowance measured at an amount equal to lifetime expected credit

losses for:

(i) financial instruments for which credit risk has increased significantly since initial recognition but that are not credit-impaired financial assets;

(ii) financial assets that are credit-impaired at the reporting date (but that

are not purchased or originated credit-impaired); and (iii) trade receivables, contract assets or lease receivables for which the

loss allowances are measured in accordance with paragraph 5.5.15 of HKFRS 9.

(c) financial assets that are purchased or originated credit-impaired. In addition to

the reconciliation, an entity shall disclose the total amount of undiscounted expected credit losses at initial recognition on financial assets initially recognised during the reporting period.

35I To enable users of financial statements to understand the changes in the loss

allowance disclosed in accordance with paragraph 35H, an entity shall provide an explanation of how significant changes in the gross carrying amount of financial instruments during the period contributed to changes in the loss allowance. The information shall be provided separately for financial instruments that represent the loss allowance as listed in paragraph 35H(a)–(c) and shall include relevant qualitative and quantitative information. Examples of changes in the gross carrying amount of financial instruments that contributed to the changes in the loss allowance may include:

(a) changes because of financial instruments originated or acquired during the

reporting period; (b) the modification of contractual cash flows on financial assets that do not result

in a derecognition of those financial assets in accordance with HKFRS 9; (c) changes because of financial instruments that were derecognised (including

those that were written-off) during the reporting period; and (d) changes arising from whether the loss allowance is measured at an amount

equal to 12-month or lifetime expected credit losses.

35J To enable users of financial statements to understand the nature and effect of modifications of contractual cash flows on financial assets that have not resulted in derecognition and the effect of such modifications on the measurement of expected credit losses, an entity shall disclose:

(a) the amortised cost before the modification and the net modification gain or


loss recognised for financial assets for which the contractual cash flows have been modified during the reporting period while they had a loss allowance measured at an amount equal to lifetime expected credit losses; and

(b) the gross carrying amount at the end of the reporting period of financial assets

that have been modified since initial recognition at a time when the loss allowance was measured at an amount equal to lifetime expected credit losses and for which the loss allowance has changed during the reporting period to an amount equal to 12-month expected credit losses.

35K To enable users of financial statements to understand the effect of collateral and other

credit enhancements on the amounts arising from expected credit losses, an entity shall disclose by class of financial instrument:

(a) the amount that best represents its maximum exposure to credit risk at the

end of the reporting period without taking account of any collateral held or other credit enhancements (eg netting agreements that do not qualify for offset in accordance with HKAS 32).

(b) a narrative description of collateral held as security and other credit

enhancements, including:

(i) a description of the nature and quality of the collateral held; (ii) an explanation of any significant changes in the quality of that

collateral or credit enhancements as a result of deterioration or changes in the collateral policies of the entity during the reporting period; and

(iii) information about financial instruments for which an entity has not

recognised a loss allowance because of the collateral.

(c) quantitative information about the collateral held as security and other credit enhancements (for example, quantification of the extent to which collateral and other credit enhancements mitigate credit risk) for financial assets that are credit-impaired at the reporting date.

35L An entity shall disclose the contractual amount outstanding on financial assets that

were written off during the reporting period and are still subject to enforcement activity.

Credit risk exposure 35M To enable users of financial statements to assess an entity’s credit risk exposure and

understand its significant credit risk concentrations, an entity shall disclose, by credit risk rating grades, the gross carrying amount of financial assets and the exposure to credit risk on loan commitments and financial guarantee contracts. This information shall be provided separately for financial instruments:

(a) for which the loss allowance is measured at an amount equal to 12-month

expected credit losses; (b) for which the loss allowance is measured at an amount equal to lifetime

expected credit losses and that are:

(i) financial instruments for which credit risk has increased significantly since initial recognition but that are not credit-impaired financial assets;

(ii) financial assets that are credit-impaired at the reporting date (but that

are not purchased or originated credit-impaired); and (iii) trade receivables, contract assets or lease receivables for which the


loss allowances are measured in accordance with paragraph 5.5.15 of HKFRS 9.

(c) that are purchased or originated credit-impaired financial assets.

35N For trade receivables, contract assets and lease receivables to which an entity applies

paragraph 5.5.15 of HKFRS 9, the information provided in accordance with paragraph 35M may be based on a provision matrix (see paragraph B5.5.35 of HKFRS 9).

36 For all financial instruments within the scope of this HKFRS, but to which the impairment requirements in HKFRS 9 are not applied, Aan entity shall disclose by class of financial instrument:

(a) the amount that best represents its maximum exposure to credit risk at the end of the reporting period without taking account of any collateral held or other credit enhancements (eg netting agreements that do not qualify for offset in accordance with HKAS 32); this disclosure is not required for financial instruments whose carrying amount best represents the maximum exposure to credit risk.

(b) a description of collateral held as security and of other credit enhancements, and their financial effect (eg a quantification of the extent to which collateral and other credit enhancements mitigate credit risk) in respect of the amount that best represents the maximum exposure to credit risk (whether disclosed in accordance with (a) or represented by the carrying amount of a financial instrument).

(c) information about the credit quality of financial assets that are neither past due

nor impaired.[deleted] (d) [deleted] Financial assets that are either past due or impaired

37 [Deleted]An entity shall disclose by class of financial asset:

(a) an analysis of the age of financial assets that are past due as at the end of the reporting period but not impaired; and

(b) an analysis of financial assets that are individually determined to be impaired

as at the end of the reporting period, including the factors the entity considered in determining that they are impaired.

(c) [deleted]

Collateral and other credit enhancements obtained 38 When an entity obtains financial or non-financial assets during the period by taking

possession of collateral it holds as security or calling on other credit enhancements (eg guarantees), and such assets meet the recognition criteria in other HKFRSs, an entity shall disclose for such assets held at the reporting date:

(a) the nature and carrying amount of the assets; and (b) when the assets are not readily convertible into cash, its policies for disposing

of such assets or for using them in its operations.


Liquidity risk 39 An entity shall disclose:

(a) a maturity analysis for non-derivative financial liabilities (including issued financial guarantee contracts) that shows the remaining contractual maturities.

(b) a maturity analysis for derivative financial liabilities. The maturity analysis shall

include the remaining contractual maturities for those derivative financial liabilities for which contractual maturities are essential for an understanding of the timing of the cash flows (see paragraph B11B).

(c) a description of how it manages the liquidity risk inherent in (a) and (b).

Market risk

Sensitivity analysis

40 Unless an entity complies with paragraph 41, it shall disclose:

(a) a sensitivity analysis for each type of market risk to which the entity is exposed at the end of the reporting period, showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date;

(b) the methods and assumptions used in preparing the sensitivity analysis; and (c) changes from the previous period in the methods and assumptions used, and

the reasons for such changes. 41 If an entity prepares a sensitivity analysis, such as value-at-risk, that reflects

interdependencies between risk variables (eg interest rates and exchange rates) and uses it to manage financial risks, it may use that sensitivity analysis in place of the analysis specified in paragraph 40. The entity shall also disclose:

(a) an explanation of the method used in preparing such a sensitivity analysis,

and of the main parameters and assumptions underlying the data provided; and

(b) an explanation of the objective of the method used and of limitations that may

result in the information not fully reflecting the fair value of the assets and liabilities involved.

Other market risk disclosures

42 When the sensitivity analyses disclosed in accordance with paragraph 40 or 41 are

unrepresentative of a risk inherent in a financial instrument (for example because the year-end exposure does not reflect the exposure during the year), the entity shall disclose that fact and the reason it believes the sensitivity analyses are unrepresentative.

Transfers of financial assets 42A The disclosure requirements in paragraphs 42B–42H relating to transfers of financial

assets supplement the other disclosure requirements of this IFRS. An entity shall present the disclosures required by paragraphs 42B–42H in a single note in its financial statements. An entity shall provide the required disclosures for all transferred financial assets that are not derecognised and for any continuing involvement in a transferred asset, existing at the reporting date, irrespective of when the related transfer transaction occurred. For the purposes of applying the


disclosure requirements in those paragraphs, an entity transfers all or a part of a financial asset (the transferred financial asset) if, and only if, it either:

(a) transfers the contractual rights to receive the cash flows of that financial asset;

or (b) retains the contractual rights to receive the cash flows of that financial asset,

but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement.

42B An entity shall disclose information that enables users of its financial statements:

(a) to understand the relationship between transferred financial assets that are not derecognised in their entirety and the associated liabilities; and

(b) to evaluate the nature of, and risks associated with, the entity’s continuing

involvement in derecognised financial assets. 42C For the purposes of applying the disclosure requirements in paragraphs 42E–42H, an

entity has continuing involvement in a transferred financial asset if, as part of the transfer, the entity retains any of the contractual rights or obligations inherent in the transferred financial asset or obtains any new contractual rights or obligations relating to the transferred financial asset. For the purposes of applying the disclosure requirements in paragraphs 42E–42H, the following do not constitute continuing involvement:

(a) normal representations and warranties relating to fraudulent transfer and

concepts of reasonableness, good faith and fair dealings that could invalidate a transfer as a result of legal action;

(b) forward, option and other contracts to reacquire the transferred financial asset

for which the contract price (or exercise price) is the fair value of the transferred financial asset; or

(c) an arrangement whereby an entity retains the contractual rights to receive the

cash flows of a financial asset but assumes a contractual obligation to pay the cash flows to one or more entities and the conditions in paragraph 19(a)–(c) of HKAS 393.2.5(a)-(c) of HKFRS 9 are met.


42D An entity may have transferred financial assets in such a way that part or all of the

transferred financial assets do not qualify for derecognition. To meet the objectives set out in paragraph 42B(a), the entity shall disclose at each reporting date for each class of transferred financial assets that are not derecognised in their entirety:

(a) the nature of the transferred assets. (b) the nature of the risks and rewards of ownership to which the entity is

exposed. (c) a description of the nature of the relationship between the transferred assets

and the associated liabilities, including restrictions arising from the transfer on the reporting entity’s use of the transferred assets.

(d) when the counterparty (counterparties) to the associated liabilities has (have)

recourse only to the transferred assets, a schedule that sets out the fair value of the transferred assets, the fair value of the associated liabilities and the net


position (the difference between the fair value of the transferred assets and the associated liabilities).

(e) when the entity continues to recognise all of the transferred assets, the

carrying amounts of the transferred assets and the associated liabilities. (f) when the entity continues to recognise the assets to the extent of its continuing

involvement (see paragraphs 20(c)(ii) and 30 of HKAS 39paragraphs 3.2.6(c)(ii) and 3.2.16 of HKFRS 9), the total carrying amount of the original assets before the transfer, the carrying amount of the assets that the entity continues to recognise, and the carrying amount of the associated liabilities.


42E To meet the objectives set out in paragraph 42B(b), when an entity derecognises

transferred financial assets in their entirety (see paragraph 20(a) and (c)(i) of HKAS 393.2.6(a) and (c)(i) of HKFRS 9) but has continuing involvement in them, the entity shall disclose, as a minimum, for each type of continuing involvement at each reporting date:

(a) the carrying amount of the assets and liabilities that are recognised in the

entity’s statement of financial position and represent the entity’s continuing involvement in the derecognised financial assets, and the line items in which the carrying amount of those assets and liabilities are recognised.

(b) the fair value of the assets and liabilities that represent the entity’s continuing

involvement in the derecognised financial assets. (c) the amount that best represents the entity’s maximum exposure to loss from

its continuing involvement in the derecognised financial assets, and information showing how the maximum exposure to loss is determined.

(d) the undiscounted cash outflows that would or may be required to repurchase

derecognised financial assets (eg the strike price in an option agreement) or other amounts payable to the transferee in respect of the transferred assets. If the cash outflow is variable then the amount disclosed should be based on the conditions that exist at each reporting date.

(e) a maturity analysis of the undiscounted cash outflows that would or may be

required to repurchase the derecognised financial assets or other amounts payable to the transferee in respect of the transferred assets, showing the remaining contractual maturities of the entity’s continuing involvement.

(f) qualitative information that explains and supports the quantitative disclosures

required in (a)–(e). 42F An entity may aggregate the information required by paragraph 42E in respect of a

particular asset if the entity has more than one type of continuing involvement in that derecognised financial asset, and report it under one type of continuing involvement.

42G In addition, an entity shall disclose for each type of continuing involvement:

(a) the gain or loss recognised at the date of transfer of the assets. (b) income and expenses recognised, both in the reporting period and

cumulatively, from the entity’s continuing involvement in the derecognised financial assets (eg fair value changes in derivative instruments).


(c) if the total amount of proceeds from transfer activity (that qualifies for derecognition) in a reporting period is not evenly distributed throughout the reporting period (eg if a substantial proportion of the total amount of transfer activity takes place in the closing days of a reporting period):

(i) when the greatest transfer activity took place within that reporting period (eg the last five days before the end of the reporting period),

(ii) the amount (eg related gains or losses) recognised from transfer

activity in that part of the reporting period, and (iii) the total amount of proceeds from transfer activity in that part of the

reporting period.

An entity shall provide this information for each period for which a statement of comprehensive income is presented.

Supplementary information 42H An entity shall disclose any additional information that it considers necessary to meet

the disclosure objectives in paragraph 42B.

Initial application of HKFRS 9

42I In the reporting period that includes the date of initial application of HKFRS 9, the

entity shall disclose the following information for each class of financial assets and financial liabilities as at the date of initial application:

(a) the original measurement category and carrying amount determined in

accordance with HKAS 39 or in accordance with a previous version of HKFRS 9 (if the entity’s chosen approach to applying HKFRS 9 involves more than one date of initial application for different requirements);

(b) the new measurement category and carrying amount determined in

accordance with HKFRS 9; (c) the amount of any financial assets and financial liabilities in the statement of

financial position that were previously designated as measured at fair value through profit or loss but are no longer so designated, distinguishing between those that HKFRS 9 requires an entity to reclassify and those that an entity elects to reclassify at the date of initial application.

In accordance with paragraph 7.2.2 of HKFRS 9, depending on the entity’s chosen approach to applying HKFRS 9, the transition can involve more than one date of initial application. Therefore this paragraph may result in disclosure on more than one date of initial application. An entity shall present these quantitative disclosures in a table unless another format is more appropriate.

42J In the reporting period that includes the date of initial application of HKFRS 9, an entity

shall disclose qualitative information to enable users to understand:

(a) how it applied the classification requirements in HKFRS 9 to those financial assets whose classification has changed as a result of applying HKFRS 9.

(b) the reasons for any designation or de-designation of financial assets or

financial liabilities as measured at fair value through profit or loss at the date of initial application.


In accordance with paragraph 7.2.2 of HKFRS 9, depending on the entity’s chosen approach to applying HKFRS 9, the transition can involve more than one date of initial application. Therefore this paragraph may result in disclosure on more than one date of initial application.

42K In the reporting period that an entity first applies the classification and measurement requirements for financial assets in HKFRS 9 (ie when the entity transitions from HKAS 39 to HKFRS 9 for financial assets), it shall present the disclosures set out in paragraphs 42L–42O of this HKFRS as required by paragraph 7.2.15 of HKFRS 9.

42L When required by paragraph 42K, an entity shall disclose the changes in the

classifications of financial assets and financial liabilities as at the date of initial application of HKFRS 9, showing separately:

(a) the changes in the carrying amounts on the basis of their measurement

categories in accordance with HKAS 39 (ie not resulting from a change in measurement attribute on transition to HKFRS 9); and

(b) the changes in the carrying amounts arising from a change in measurement

attribute on transition to HKFRS 9.

The disclosures in this paragraph need not be made after the annual reporting period in which the entity initially applies the classification and measurement requirements for financial assets in HKFRS 9.

42M When required by paragraph 42K, an entity shall disclose the following for financial

assets and financial liabilities that have been reclassified so that they are measured at amortised cost and, in the case of financial assets, that have been reclassified out of fair value through profit or loss so that they are measured at fair value through other comprehensive income, as a result of the transition to HKFRS 9:

(a) the fair value of the financial assets or financial liabilities at the end of the

reporting period; and (b) the fair value gain or loss that would have been recognised in profit or loss or

other comprehensive income during the reporting period if the financial assets or financial liabilities had not been reclassified.

The disclosures in this paragraph need not be made after the annual reporting period in which the entity initially applies the classification and measurement requirements for financial assets in HKFRS 9.

42N When required by paragraph 42K, an entity shall disclose the following for financial

assets and financial liabilities that have been reclassified out of the fair value through profit or loss category as a result of the transition to HKFRS 9:

(a) the effective interest rate determined on the date of initial application; and (b) the interest revenue or expense recognised. If an entity treats the fair value of a financial asset or a financial liability as the new gross carrying amount at the date of initial application (see paragraph 7.2.11 of HKFRS 9), the disclosures in this paragraph shall be made for each reporting period until derecognition. Otherwise, the disclosures in this paragraph need not be made after the annual reporting period in which the entity initially applies the classification and measurement requirements for financial assets in HKFRS 9.

42O When an entity presents the disclosures set out in paragraphs 42K–42N, those disclosures, and the disclosures in paragraph 25 of this HKFRS, must permit reconciliation between:


(a) the measurement categories presented in accordance with HKAS 39 and

HKFRS 9; and (b) the class of financial instrument as at the date of initial application.

42P On the date of initial application of Section 5.5 of HKFRS 9, an entity is required to

disclose information that would permit the reconciliation of the ending impairment allowances in accordance with HKAS 39 and the provisions in accordance with HKAS 37 to the opening loss allowances determined in accordance with HKFRS 9. For financial assets, this disclosure shall be provided by the related financial assets’ measurement categories in accordance with HKAS 39 and HKFRS 9, and shall show separately the effect of the changes in the measurement category on the loss allowance at that date.

42Q In the reporting period that includes the date of initial application of HKFRS 9, an entity

is not required to disclose the line item amounts that would have been reported in accordance with the classification and measurement requirements (which includes the requirements related to amortised cost measurement of financial assets and impairment in Sections 5.4 and 5.5 of HKFRS 9) of:

(a) HKFRS 9 for prior periods; and (b) HKAS 39 for the current period.

42R In accordance with paragraph 7.2.4 of HKFRS 9, if it is impracticable (as defined in

HKAS 8) at the date of initial application of HKFRS 9 for an entity to assess a modified time value of money element in accordance with paragraphs B4.1.9B–B4.1.9D of HKFRS 9 based on the facts and circumstances that existed at the initial recognition of the financial asset, an entity shall assess the contractual cash flow characteristics of that financial asset based on the facts and circumstances that existed at the initial recognition of the financial asset without taking into account the requirements related to the modification of the time value of money element in paragraphs B4.1.9B–B4.1.9D of HKFRS 9. An entity shall disclose the carrying amount at the reporting date of the financial assets whose contractual cash flow characteristics have been assessed based on the facts and circumstances that existed at the initial recognition of the financial asset without taking into account the requirements related to the modification of the time value of money element in paragraphs B4.1.9B–B4.1.9D of HKFRS 9 until those financial assets are derecognised.

42S In accordance with paragraph 7.2.5 of HKFRS 9, if it is impracticable (as defined in

HKAS 8) at the date of initial application for an entity to assess whether the fair value of a prepayment feature was insignificant in accordance with paragraphs B4.1.12(c) of HKFRS 9 based on the facts and circumstances that existed at the initial recognition of the financial asset, an entity shall assess the contractual cash flow characteristics of that financial asset based on the facts and circumstances that existed at the initial recognition of the financial asset without taking into account the exception for prepayment features in paragraph B4.1.12 of HKFRS 9. An entity shall disclose the carrying amount at the reporting date of the financial assets whose contractual cash flow characteristics have been assessed based on the facts and circumstances that existed at the initial recognition of the financial asset without taking into account the exception for prepayment features in paragraph B4.1.12 of HKFRS 9 until those financial assets are derecognised.


Effective date and transition

43 An entity shall apply this HKFRS for annual periods beginning on or after 1 January 2007. Earlier application is encouraged. If an entity applies this HKFRS for an earlier period, it shall disclose that fact.

44 If an entity applies this HKFRS for annual periods beginning before 1 January 2006, it

need not present comparative information for the disclosures required by paragraphs 31-42 about the nature and extent of risks arising from financial instruments.

44A HKAS 1 (as revised in 2007) amended the terminology used throughout HKFRSs. In

addition it amended paragraphs 20, 21, 23(c) and (d), 27(c) and B5 of Appendix B. An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. If an entity applies HKAS 1 (revised 2007) for an earlier period, the amendments shall be applied for that earlier period.

44B HKFRS 3 (as revised in 2008) deleted paragraph 3(c). An entity shall apply that

amendment for annual periods beginning on or after 1 July 2009. If an entity applies HKFRS 3 (revised 2008) for an earlier period, the amendment shall also be applied for that earlier period. However, the amendment does not apply to contingent consideration that arose from a business combination for which the acquisition date preceded the application of HKFRS 3 (revised 2008). Instead, an entity shall account for such consideration in accordance with paragraphs 65A–65E of HKFRS 3 (as amended in 2010).

44C An entity shall apply the amendment in paragraph 3 for annual periods beginning on or

after 1 January 2009. If an entity applies Puttable Financial Instruments and Obligations Arising on Liquidation (Amendments to HKAS 32 and HKAS 1), issued in June 2008, for an earlier period, the amendment in paragraph 3 shall be applied for that earlier period.

44D Paragraph 3(a) was amended by Improvements to HKFRSs issued in October 2008.

An entity shall apply that amendment for annual periods beginning on or after 1 January 2009. Earlier application is permitted. If an entity applies the amendment for an earlier period it shall disclose that fact and apply for that earlier period the amendments to paragraph 1 of HKAS 28, paragraph 1 of HKAS 31 and paragraph 4 of HKAS 32 issued in October 2008. An entity is permitted to apply the amendment prospectively.

44E Reclassification of Financial Assets (Amendments to HKAS 39 and HKFRS 7), issued in October 2008, amended paragraph 12 and added paragraph 12A. An entity shall apply those amendments on or after 1 July 2008.[Deleted]

44F Reclassification of Financial Assets—Effective Date and Transition (Amendments to

HKAS 39 and HKFRS 7), issued in December 2008, amended paragraph 44E. An entity shall apply that amendment on or after 1 July 2008.[Deleted]


44G Improving Disclosures about Financial Instruments (Amendments to HKFRS 7), issued in March 2009, amended paragraphs 27, 39 and B11 and added paragraphs 27A, 27B, B10A and B11A–B11F. An entity shall apply those amendments for annual periods beginning on or after 1 January 2009. An entity need not provide the disclosures required by the amendments for: (a) any annual or interim period, including any statement of financial position,

presented within an annual comparative period ending before 31 December 2009, or

(b) any statement of financial position as at the beginning of the earliest

comparative period as at a date before 31 December 2009.

Earlier application is permitted. If an entity applies the amendments for an earlier period, it shall disclose that fact.

*

44H-44J [These paragraphs refer to amendments with an effective date after 1 January 2013,

and are therefore not included in this edition.][Deleted] 44K Paragraph 44B was amended by Improvements to HKFRSs issued in May 2010. An

entity shall apply that amendment for annual periods beginning on or after 1 July 2010. Earlier application is permitted.

44L Improvements to HKFRSs issued in May 2010 added paragraph 32A and amended

paragraphs 34 and 36–38. An entity shall apply those amendments for annual periods beginning on or after 1 January 2011. Earlier application is permitted. If an entity applies the amendments for an earlier period it shall disclose that fact.

44M Disclosures—Transfers of Financial Assets (Amendments to HKFRS 7), issued in

October 2010, deleted paragraph 13 and added paragraphs 42A–42H and B29–B39. An entity shall apply those amendments for annual periods beginning on or after 1 July 2011. Earlier application is permitted. If an entity applies the amendments from an earlier date, it shall disclose that fact. An entity need not provide the disclosures required by those amendments for any period presented that begins before the date of initial application of the amendments.

44N [This paragraph refers to amendments with an effective date after 1 January 2013, and

is therefore not included in this edition.][Deleted] 44O HKFRS 10 and HKFRS 11 Joint Arrangements, issued in June 2011, amended

paragraph 3. An entity shall apply that amendment when it applies HKFRS 10 and HKFRS 11.

44P HKFRS 13, issued in June 2011, amended paragraphs 3, 28 and 29 and Appendix A

and deleted paragraphs 27-27B. An entity shall apply those amendments when it applies HKFRS 13.

44Q Presentation of Items of Other Comprehensive Income (Amendments to HKAS 1),

issued in July 2011, amended paragraph 27B. An entity shall apply that amendment when it applies HKAS 1 as amended in June 2011.

44R Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to

HKFRS 7), issued in December 2011, added paragraphs 13A-13F and B40-B53. An entity shall apply those amendments for annual periods beginning on or after 1 January 2013. An entity shall provide the disclosures required by those amendments retrospectively.

* Paragraph 44G was amended as a consequence of Limited Exemption from Comparative HKFRS 7 Disclosures

for First-time Adopters (Amendment to HKFRS 1) issued in February 2010. The HKICPA amended paragraph 44G to clarify its conclusions and intended transition for Improving Disclosures about Financial Instruments (Amendments to HKFRS 7).


44S– 44W

[These paragraphs refer to amendments with an effective date after 1 January 2015, and are therefore not included in this edition.] [Deleted]

Withdrawal of HKAS 30

44X Investment Entities (Amendments to HKFRS 10, HKFRS 12 and HKAS 27 (2011)),

issued in December 2012, amended paragraph 3. An entity shall apply that amendment for annual periods beginning on or after 1 January 2014. Earlier application of Investment Entities is permitted. If an entity applies that amendment earlier it shall also apply all amendments included in Investment Entities at the same time.

44Y-ZA [This paragraph refers to amendments that are not yet effective, and is therefore not

included in this edition.][Deleted]

44Z HKFRS 9, as issued in September 2014, amended paragraphs 2–5, 8–11, 14, 20, 28–30, 36, 42C–42E, Appendix A and paragraphs B1, B5, B9, B10, B22 and B27, deleted paragraphs 12, 12A, 16, 22–24, 37, 44E, 44F, 44H–44J, 44N, 44S–44W, 44Y, B4 and Appendix D and added paragraphs 5A, 10A, 11A, 11B, 12B–12D, 16A, 20A, 21A–21D, 22A–22C, 23A–23F, 24A–24G, 35A–35N, 42I–42S, 44ZA and B8A–B8J. An entity shall apply those amendments when it applies HKFRS 9. Those amendments need not be applied to comparative information provided for periods before the date of initial application of HKFRS 9.

44ZA In accordance with paragraph 7.1.2 of HKFRS 9, for annual reporting periods prior to 1

January 2018, an entity may elect to early apply only the requirements for the presentation of gains and losses on financial liabilities designated as at fair value through profit or loss in paragraphs 5.7.1(c), 5.7.7–5.7.9, 7.2.14 and B5.7.5–B5.7.20 of HKFRS 9 without applying the other requirements in HKFRS 9. If an entity elects to apply only those paragraphs of HKFRS 9, it shall disclose that fact and provide on an ongoing basis the related disclosures set out in paragraphs 10–11 of this HKFRS (as amended by HKFRS 9 (2010)).

44AA Annual Improvements to HKFRSs 2012–2014 Cycle, issued in October 2014,

amended paragraphs 44R and B30 and added paragraph B30A. An entity shall apply those amendments retrospectively in accordance with HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors for annual periods beginning on or after 1 January 2016, except that an entity need not apply the amendments to paragraphs B30 and B30A for any period presented that begins before the annual period for which the entity first applies those amendments. Earlier application of the amendments to paragraphs 44R, B30 and B30A is permitted. If an entity applies those amendments for an earlier period it shall disclose that fact.

44BB Disclosure Initiative (Amendments to HKAS 1), issued in January 2015, amended

paragraphs 21 and B5. An entity shall apply those amendments for annual periods beginning on or after 1 January 2016. Earlier application of those amendments is permitted.

Withdrawal of HKAS 30

45 This HKFRS supersedes HKAS 30 Disclosures in the Financial Statements of Banks

and Similar Financial Institutions.


Appendix A Defined terms

This appendix is an integral part of the HKFRS.

credit risk The risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

credit risk rating grades

Rating of credit risk based on the risk of a default occurring on the financial instrument.

currency risk The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

interest rate risk The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

liquidity risk The risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.

loans payable Loans payable are financial liabilities, other than short-term trade payables on normal credit terms.

market risk The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rate risk and other price risk.

other price risk The risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or by factors affecting all similar financial instruments traded in the market.

past due A financial asset is past due when a counterparty has failed to make a payment when contractually due.

The following terms are defined in paragraph 11 of HKAS 32, or paragraph 9 of HKAS 39, Appendix A of HKFRS 9 or Appendix A of HKFRS 13 and are used in the HKFRS with the meaning specified in HKAS 32 and, HKAS 39, HKFRS 9 and HKFRS 13.

amortised cost of a financial asset or financial liability

available-for-sale financial assetscontract asset

credit-impaired financial assets

derecognition

derivative

dividends

effective interest method

equity instrument


expected credit losses

fair value

financial asset

financial asset or financial liability at fair value through profit or loss

financial asset or financial liability held for trading

financial guarantee contract

financial instrument

financial liability

financial liability at fair value through profit or loss

forecast transaction

gross carrying amount of a financial asset

hedging instrument

held-to-maturity investmentsheld for trading

impairment gains or losses

loss allowance

past due

purchased or originated credit-impaired financial assets

reclassification date

loans and receivables

regular way purchase or sale


Appendix B Application guidance

This appendix is an integral part of the HKFRS.

Classes of financial instruments and level of disclosure (paragraph 6)

B1 Paragraph 6 requires an entity to group financial instruments into classes that are

appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments. The classes described in paragraph 6 are determined by the entity and are, thus, distinct from the categories of financial instruments specified in HKAS 39 HKFRS 9 (which determine how financial instruments are measured and where changes in fair value are recognised).

B2 In determining classes of financial instrument, an entity shall, at a minimum:

(a) distinguish instruments measured at amortised cost from those measured at fair value.

(b) treat as a separate class or classes those financial instruments outside the

scope of this HKFRS. B3 An entity decides, in the light of its circumstances, how much detail it provides to

satisfy the requirements of this HKFRS, how much emphasis it places on different aspects of the requirements and how it aggregates information to display the overall picture without combining information with different characteristics. It is necessary to strike a balance between overburdening financial statements with excessive detail that may not assist users of financial statements and obscuring important information as a result of too much aggregation. For example, an entity shall not obscure important information by including it among a large amount of insignificant detail. Similarly, an entity shall not disclose information that is so aggregated that it obscures important differences between individual transactions or associated risks.

Significance of financial instruments for financial position and performance

Financial liabilities at fair value through profit or loss (paragraphs 10 and 11)

B4 [Deleted]If an entity designates a financial liability as at fair value through profit or loss, paragraph 10(a) requires it to disclose the amount of change in the fair value of the financial liability that is attributable to changes in the liability’s credit risk. Paragraph 10(a)(i) permits an entity to determine this amount as the amount of change in the liability’s fair value that is not attributable to changes in market conditions that give rise to market risk. If the only relevant changes in market conditions for a liability are changes in an observed (benchmark) interest rate, this amount can be estimated as follows:

(a) First, the entity computes the liability’s internal rate of return at the start of the

period using the observed market price of the liability and the liability’s contractual cash flows at the start of the period. It deducts from this rate of return the observed (benchmark) interest rate at the start of the period, to arrive at an instrument-specific component of the internal rate of return.

(b) Next, the entity calculates the present value of the cash flows associated with

the liability using the liability’s contractual cash flows at the end of the period and a discount rate equal to the sum of (i) the observed (benchmark) interest rate at the end of the period and (ii) the instrument-specific component of the internal rate of return as determined in (a).


(c) The difference between the observed market price of the liability at the end of

the period and the amount determined in (b) is the change in fair value that is not attributable to changes in the observed (benchmark) interest rate. This is the amount to be disclosed.

This example assumes that changes in fair value arising from factors other than

changes in the instrument’s credit risk or changes in interest rates are not significant. If the instrument in the example contains an embedded derivative, the change in fair value of the embedded derivative is excluded in determining the amount to be disclosed in accordance with paragraph 10(a).

Other disclosure — accounting policies (paragraph 21)

B5 Paragraph 21 requires disclosure of the measurement basis (or bases) used in preparing the financial statements and the other accounting policies used that are relevant to an understanding of the financial statements. For financial instruments, such disclosure may include:

(a) for financial assets or financial liabilities designated as at fair value through

profit or loss:

(i) the nature of the financial assets or financial liabilities the entity has designated as at fair value through profit or loss;

(ii) the criteria for so designating such financial assets or financial

liabilities on initial recognition; and (iii) how the entity has satisfied the conditions in paragraph 9, 11A or 12

of HKAS 394.2.2 of HKFRS 9 for such designation. For instruments designated in accordance with paragraph (b)(i) of the definition of a financial asset or financial liability at fair value through profit or loss in HKAS 39, that disclosure includes a narrative description of the circumstances underlying the measurement or recognition inconsistency that would otherwise arise. For instruments designated in accordance with paragraph (b)(ii) of the definition of a financial asset or financial liability at fair value through profit or loss in HKAS 39, that disclosure includes a narrative description of how designation at fair value through profit or loss is consistent with the entity’s documented risk management or investment strategy.

(aa) for financial assets designated as measured at fair value through profit or loss:

(i) the nature of the financial assets the entity has designated as measured

at fair value through profit or loss; and (ii) how the entity has satisfied the criteria in paragraph 4.1.5 of HKFRS 9 for

such designation.

(b) [deleted]the criteria for designating financial assets as available for sale. (c) whether regular way purchases and sales of financial assets are accounted

for at trade date or at settlement date (see paragraph 38 of HKAS 393.1.2 of HKFRS 9).

(d) [deleted]when an allowance account is used to reduce the carrying amount of

financial assets impaired by credit losses:

(i) the criteria for determining when the carrying amount of impaired financial assets is reduced directly (or, in the case of a reversal of a


write-down, increased directly) and when the allowance account is used; and

(ii) the criteria for writing off amounts charged to the allowance account

against the carrying amount of impaired financial assets (see paragraph 16).

(e) how net gains or net losses on each category of financial instrument are

determined (see paragraph 20(a)), for example, whether the net gains or net losses on items at fair value through profit or loss include interest or dividend income.

(f) [deleted]the criteria the entity uses to determine that there is objective

evidence that an impairment loss has occurred (see paragraph 20(e)). (g) [deleted]when the terms of financial assets that would otherwise be past due

or impaired have been renegotiated, the accounting policy for financial assets that are the subject of renegotiated terms.

Paragraph 122 of HKAS 1 (as revised in 2007) also requires entities to disclose, along

with its significant accounting policies or other notes, the judgements, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

Nature and extent of risks arising from financial instruments (paragraphs 31-42)

B6 The disclosures required by paragraphs 31-42 shall be either given in the financial statements or incorporated by cross-reference from the financial statements to some other statement, such as a management commentary or risk report, that is available to users of the financial statements on the same terms as the financial statements and at the same time. Without the information incorporated by cross-reference, the financial statements are incomplete.

Quantitative disclosures (paragraph 34)

B7 Paragraph 34(a) requires disclosures of summary quantitative data about an entity’s

exposure to risks based on the information provided internally to key management personnel of the entity. When an entity uses several methods to manage a risk exposure, the entity shall disclose information using the method or methods that provide the most relevant and reliable information. HKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors discusses relevance and reliability.

B8 Paragraph 34(c) requires disclosures about concentrations of risk. Concentrations of

risk arise from financial instruments that have similar characteristics and are affected similarly by changes in economic or other conditions. The identification of concentrations of risk requires judgement taking into account the circumstances of the entity. Disclosure of concentrations of risk shall include:

(a) a description of how management determines concentrations; (b) a description of the shared characteristic that identifies each concentration (eg

counterparty, geographical area, currency or market); and (c) the amount of the risk exposure associated with all financial instruments

sharing that characteristic.


Credit risk management practices (paragraphs 35F–35G)

B8A Paragraph 35F(b) requires the disclosure of information about how an entity has defined default for different financial instruments and the reasons for selecting those definitions. In accordance with paragraph 5.5.9 of HKFRS 9, the determination of whether lifetime expected credit losses should be recognised is based on the increase in the risk of a default occurring since initial recognition. Information about an entity’s definitions of default that will assist users of financial statements in understanding how an entity has applied the expected credit loss requirements in HKFRS 9 may include:

(a) the qualitative and quantitative factors considered in defining default; (b) whether different definitions have been applied to different types of financial

instruments; and (c) assumptions about the cure rate (ie the number of financial assets that return

to a performing status) after a default occurred on the financial asset.

B8B To assist users of financial statements in evaluating an entity’s restructuring and modification policies, paragraph 35F(f)(ii) requires the disclosure of information about how an entity monitors the extent to which the loss allowance on financial assets previously disclosed in accordance with paragraph 35F(f)(i) are subsequently measured at an amount equal to lifetime expected credit losses in accordance with paragraph 5.5.3 of HKFRS 9. Quantitative information that will assist users in understanding the subsequent increase in credit risk of modified financial assets may include information about modified financial assets meeting the criteria in paragraph 35F(f)(i) for which the loss allowance has reverted to being measured at an amount equal to lifetime expected credit losses (ie a deterioration rate).

B8C Paragraph 35G(a) requires the disclosure of information about the basis of inputs and

assumptions and the estimation techniques used to apply the impairment requirements in HKFRS 9. An entity’s assumptions and inputs used to measure expected credit losses or determine the extent of increases in credit risk since initial recognition may include information obtained from internal historical information or rating reports and assumptions about the expected life of financial instruments and the timing of the sale of collateral.

Changes in the loss allowance (paragraph 35H) B8D In accordance with paragraph 35H, an entity is required to explain the reasons for the

changes in the loss allowance during the period. In addition to the reconciliation from the opening balance to the closing balance of the loss allowance, it may be necessary to provide a narrative explanation of the changes. This narrative explanation may include an analysis of the reasons for changes in the loss allowance during the period, including:

(a) the portfolio composition; (b) the volume of financial instruments purchased or originated; and (c) the severity of the expected credit losses.

B8E For loan commitments and financial guarantee contracts the loss allowance is

recognised as a provision. An entity should disclose information about the changes in the loss allowance for financial assets separately from those for loan commitments and financial guarantee contracts. However, if a financial instrument includes both a loan (ie financial asset) and an undrawn commitment (ie loan commitment) component and the entity cannot separately identify the expected credit losses on the loan commitment component from those on the financial asset component, the expected


credit losses on the loan commitment should be recognised together with the loss allowance for the financial asset. To the extent that the combined expected credit losses exceed the gross carrying amount of the financial asset, the expected credit losses should be recognised as a provision.

Collateral (paragraph 35K) B8F Paragraph 35K requires the disclosure of information that will enable users of financial

statements to understand the effect of collateral and other credit enhancements on the amount of expected credit losses. An entity is neither required to disclose information about the fair value of collateral and other credit enhancements nor is it required to quantify the exact value of the collateral that was included in the calculation of expected credit losses (ie the loss given default).

B8G A narrative description of collateral and its effect on amounts of expected credit losses

might include information about:

(a) the main types of collateral held as security and other credit enhancements (examples of the latter being guarantees, credit derivatives and netting agreements that do not qualify for offset in accordance with HKAS 32);

(b) the volume of collateral held and other credit enhancements and its

significance in terms of the loss allowance; (c) the policies and processes for valuing and managing collateral and other

credit enhancements; (d) the main types of counterparties to collateral and other credit enhancements

and their creditworthiness; and (e) information about risk concentrations within the collateral and other credit

enhancements.

Credit risk exposure (paragraphs 35M–35N)

B8H Paragraph 35M requires the disclosure of information about an entity’s credit risk

exposure and significant concentrations of credit risk at the reporting date. A concentration of credit risk exists when a number of counterparties are located in a geographical region or are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. An entity should provide information that enables users of financial statements to understand whether there are groups or portfolios of financial instruments with particular features that could affect a large portion of that group of financial instruments such as concentration to particular risks. This could include, for example, loan-to-value groupings, geographical, industry or issuer-type concentrations.

B8I The number of credit risk rating grades used to disclose the information in accordance

with paragraph 35M shall be consistent with the number that the entity reports to key management personnel for credit risk management purposes. If past due information is the only borrower-specific information available and an entity uses past due information to assess whether credit risk has increased significantly since initial recognition in accordance with paragraph 5.5.11 of HKFRS 9, an entity shall provide an analysis by past due status for those financial assets.

B8J When an entity has measured expected credit losses on a collective basis, the entity

may not be able to allocate the gross carrying amount of individual financial assets or the exposure to credit risk on loan commitments and financial guarantee contracts to the credit risk rating grades for which lifetime expected credit losses are recognised. In


that case, an entity should apply the requirement in paragraph 35M to those financial instruments that can be directly allocated to a credit risk rating grade and disclose separately the gross carrying amount of financial instruments for which lifetime expected credit losses have been measured on a collective basis.

Maximum credit risk exposure (paragraph 36(a))

B9 Paragraphs 35K(a) and 36(a) requires disclosure of the amount that best represents the entity’s maximum exposure to credit risk. For a financial asset, this is typically the gross carrying amount, net of:

(a) any amounts offset in accordance with HKAS 32; and

(b) any impairment losses allowance recognised in accordance with HKAS

39HKFRS 9. B10 Activities that give rise to credit risk and the associated maximum exposure to credit

risk include, but are not limited to:

(a) granting loans and receivables to customers and placing deposits with other entities. In these cases, the maximum exposure to credit risk is the carrying amount of the related financial assets.

(b) entering into derivative contracts, eg foreign exchange contracts, interest rate

swaps and credit derivatives. When the resulting asset is measured at fair value, the maximum exposure to credit risk at the end of the reporting period will equal the carrying amount.

(c) granting financial guarantees. In this case, the maximum exposure to credit

risk is the maximum amount the entity could have to pay if the guarantee is called on, which may be significantly greater than the amount recognised as a liability.

(d) making a loan commitment that is irrevocable over the life of the facility or is

revocable only in response to a material adverse change. If the issuer cannot settle the loan commitment net in cash or another financial instrument, the maximum credit exposure is the full amount of the commitment. This is because it is uncertain whether the amount of any undrawn portion may be drawn upon in the future. This may be significantly greater than the amount recognised as a liability.

Quantitative liquidity risk disclosures (paragraphs 34(a) and 39(a) and (b))

B10A In accordance with paragraph 34(a) an entity discloses summary quantitative data about its exposure to liquidity risk on the basis of the information provided internally to key management personnel. An entity shall explain how those data are determined. If the outflows of cash (or another financial asset) included in those data could either:

(a) occur significantly earlier than indicated in the data, or

(b) be for significantly different amounts from those indicated in the data (eg for a derivative that is included in the data on a net settlement basis but for which the counterparty has the option to require gross settlement),

the entity shall state that fact and provide quantitative information that enables users of its financial statements to evaluate the extent of this risk unless that information is included in the contractual maturity analyses required by paragraph 39(a) or (b).


B11 In preparing the maturity analyses required by paragraph 39(a) and (b), an entity uses its judgement to determine an appropriate number of time bands. For example, an entity might determine that the following time bands are appropriate:

(a) not later than one month;

(b) later than one month and not later than three months;

(c) later than three months and not later than one year; and

(d) later than one year and not later than five years.

B11A In complying with paragraph 39(a) and (b), an entity shall not separate an embedded derivative from a hybrid (combined) financial instrument. For such an instrument, an entity shall apply paragraph 39(a).

B11B Paragraph 39(b) requires an entity to disclose a quantitative maturity analysis for derivative financial liabilities that shows remaining contractual maturities if the contractual maturities are essential for an understanding of the timing of the cash flows. For example, this would be the case for:

(a) an interest rate swap with a remaining maturity of five years in a cash flow hedge of a variable rate financial asset or liability.

(b) all loan commitments.

B11C Paragraph 39(a) and (b) requires an entity to disclose maturity analyses for financial liabilities that show the remaining contractual maturities for some financial liabilities. In this disclosure:

(a) when a counterparty has a choice of when an amount is paid, the liability is allocated to the earliest period in which the entity can be required to pay. For example, financial liabilities that an entity can be required to repay on demand (eg demand deposits) are included in the earliest time band.

(b) when an entity is committed to make amounts available in instalments, each instalment is allocated to the earliest period in which the entity can be required to pay. For example, an undrawn loan commitment is included in the time band containing the earliest date it can be drawn down.

(c) for issued financial guarantee contracts the maximum amount of the guarantee is allocated to the earliest period in which the guarantee could be called.

B11D The contractual amounts disclosed in the maturity analyses as required by paragraph 39(a) and (b) are the contractual undiscounted cash flows, for example:

(a) gross finance lease obligations (before deducting finance charges);

(b) prices specified in forward agreements to purchase financial assets for cash;

(c) net amounts for pay-floating/receive-fixed interest rate swaps for which net cash flows are exchanged;

(d) contractual amounts to be exchanged in a derivative financial instrument (eg a currency swap) for which gross cash flows are exchanged; and

(e) gross loan commitments.


Such undiscounted cash flows differ from the amount included in the statement of financial position because the amount in that statement is based on discounted cash flows. When the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the end of the reporting period. For example, when the amount payable varies with changes in an index, the amount disclosed may be based on the level of the index at the end of the period.

B11E Paragraph 39(c) requires an entity to describe how it manages the liquidity risk inherent in the items disclosed in the quantitative disclosures required in paragraph 39(a) and (b). An entity shall disclose a maturity analysis of financial assets it holds for managing liquidity risk (eg financial assets that are readily saleable or expected to generate cash inflows to meet cash outflows on financial liabilities), if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk.

B11F Other factors that an entity might consider in providing the disclosure required in

paragraph 39(c) include, but are not limited to, whether the entity:

(a) has committed borrowing facilities (eg commercial paper facilities) or other lines of credit (eg stand-by credit facilities) that it can access to meet liquidity needs;

(b) holds deposits at central banks to meet liquidity needs;

(c) has very diverse funding sources;

(d) has significant concentrations of liquidity risk in either its assets or its funding sources;

(e) has internal control processes and contingency plans for managing liquidity risk;

(f) has instruments that include accelerated repayment terms (eg on the downgrade of the entity’s credit rating);

(g) has instruments that could require the posting of collateral (eg margin calls for derivatives);

(h) has instruments that allow the entity to choose whether it settles its financial liabilities by delivering cash (or another financial asset) or by delivering its own shares; or

(i) has instruments that are subject to master netting agreements. B12-B16 [Deleted]

Market risk — sensitivity analysis (paragraphs 40 and 41)

B17 Paragraph 40(a) requires a sensitivity analysis for each type of market risk to which the entity is exposed. In accordance with paragraph B3, an entity decides how it aggregates information to display the overall picture without combining information with different characteristics about exposures to risks from significantly different economic environments. For example:

(a) an entity that trades financial instruments might disclose this information

separately for financial instruments held for trading and those not held for trading.


(b) an entity would not aggregate its exposure to market risks from areas of hyperinflation with its exposure to the same market risks from areas of very low inflation.

If an entity has exposure to only one type of market risk in only one economic

environment, it would not show disaggregated information. B18 Paragraph 40(a) requires the sensitivity analysis to show the effect on profit or loss

and equity of reasonably possible changes in the relevant risk variable (eg prevailing market interest rates, currency rates, equity prices or commodity prices). For this purpose:

(a) entities are not required to determine what the profit or loss for the period

would have been if relevant risk variables had been different. Instead, entities disclose the effect on profit or loss and equity at the end of the reporting period assuming that a reasonably possible change in the relevant risk variable had occurred at the end of the reporting period and had been applied to the risk exposures in existence at that date. For example, if an entity has a floating rate liability at the end of the year, the entity would disclose the effect on profit or loss (ie interest expense) for the current year if interest rates had varied by reasonably possible amounts.

(b) entities are not required to disclose the effect on profit or loss and equity for

each change within a range of reasonably possible changes of the relevant risk variable. Disclosure of the effects of the changes at the limits of the reasonably possible range would be sufficient.

B19 In determining what a reasonably possible change in the relevant risk variable is, an

entity should consider: (a) the economic environments in which it operates. A reasonably possible

change should not include remote or “worst case” scenarios or “stress tests”. Moreover, if the rate of change in the underlying risk variable is stable, the entity need not alter the chosen reasonably possible change in the risk variable. For example, assume that interest rates are 5 per cent and an entity determines that a fluctuation in interest rates of ±50 basis points is reasonably possible. It would disclose the effect on profit or loss and equity if interest rates were to change to 4.5 per cent or 5.5 per cent. In the next period, interest rates have increased to 5.5 per cent. The entity continues to believe that interest rates may fluctuate by ±50 basis points (ie that the rate of change in interest rates is stable). The entity would disclose the effect on profit or loss and equity if interest rates were to change to 5 per cent or 6 per cent. The entity would not be required to revise its assessment that interest rates might reasonably fluctuate by ±50 basis points, unless there is evidence that interest rates have become significantly more volatile.

(b) the time frame over which it is making the assessment. The sensitivity

analysis shall show the effects of changes that are considered to be reasonably possible over the period until the entity will next present these disclosures, which is usually its next annual reporting period.

B20 Paragraph 41 permits an entity to use a sensitivity analysis that reflects

interdependencies between risk variables, such as a value-at-risk methodology, if it uses this analysis to manage its exposure to financial risks. This applies even if such a methodology measures only the potential for loss and does not measure the potential for gain. Such an entity might comply with paragraph 41(a) by disclosing the type of value-at-risk model used (eg whether the model relies on Monte Carlo simulations), an explanation about how the model works and the main assumptions (eg the holding period and confidence level). Entities might also disclose the historical observation period and weightings applied to observations within that period, an explanation of


how options are dealt with in the calculations, and which volatilities and correlations (or, alternatively, Monte Carlo probability distribution simulations) are used.

B21 An entity shall provide sensitivity analyses for the whole of its business, but may

provide different types of sensitivity analysis for different classes of financial instruments.

Interest rate risk

B22 Interest rate risk arises on interest-bearing financial instruments recognised in the statement of financial position (eg loans and receivables and debt instruments acquired or issued) and on some financial instruments not recognised in the statement of financial position (eg some loan commitments).

Currency risk

B23 Currency risk (or foreign exchange risk) arises on financial instruments that are denominated in a foreign currency, ie in a currency other than the functional currency in which they are measured. For the purpose of this HKFRS, currency risk does not arise from financial instruments that are non-monetary items or from financial instruments denominated in the functional currency.

B24 A sensitivity analysis is disclosed for each currency to which an entity has significant

exposure. Other price risk

B25 Other price risk arises on financial instruments because of changes in, for example, commodity prices or equity prices. To comply with paragraph 40, an entity might disclose the effect of a decrease in a specified stock market index, commodity price, or other risk variable. For example, if an entity gives residual value guarantees that are financial instruments, the entity discloses an increase or decrease in the value of the assets to which the guarantee applies.

B26 Two examples of financial instruments that give rise to equity price risk are (a) a

holding of equities in another entity and (b) an investment in a trust that in turn holds investments in equity instruments. Other examples include forward contracts and options to buy or sell specified quantities of an equity instrument and swaps that are indexed to equity prices. The fair values of such financial instruments are affected by changes in the market price of the underlying equity instruments.

B27 In accordance with paragraph 40(a), the sensitivity of profit or loss (that arises, for

example, from instruments classified asmeasured at fair value through profit or loss and impairments of available-for-sale financial assets) is disclosed separately from the sensitivity of equityother comprehensive income (that arises, for example, from instruments classified as available for saleinvestments in equity instruments whose changes in fair value are presented in other comprehensive income).

B28 Financial instruments that an entity classifies as equity instruments are not

remeasured. Neither profit or loss nor equity will be affected by the equity price risk of those instruments. Accordingly, no sensitivity analysis is required.

Derecognition (paragraphs 42C–42H)

Continuing involvement (paragraph 42C)

B29 The assessment of continuing involvement in a transferred financial asset for the

purposes of the disclosure requirements in paragraphs 42E–42H is made at the level of the reporting entity. For example, if a subsidiary transfers to an unrelated third party a financial asset in which the parent of the subsidiary has continuing


involvement, the subsidiary does not include the parent’s involvement in the assessment of whether it has continuing involvement in the transferred asset in its separate or individual financial statements (ie when the subsidiary is the reporting entity). However, a parent would include its continuing involvement (or that of another member of the group) in a financial asset transferred by its subsidiary in determining whether it has continuing involvement in the transferred asset in its consolidated financial statements (ie when the report ing entity is the group).

B30 An entity does not have a continuing involvement in a transferred financial asset if, as

part of the transfer, it neither retains any of the contractual rights or obligations inherent in the transferred financial asset nor acquires any new contractual rights or obligations relating to the transferred financial asset. An entity does not have continuing involvement in a transferred financial asset if it has neither an interest in the future performance of the transferred financial asset nor a responsibility under any circumstances to make payments in respect of the transferred financial asset in the future. The term ‘payment’ in this context does not include cash flows of the transferred financial asset that an entity collects and is required to remit to the transferee.

B30A When an entity transfers a financial asset, the entity may retain the right to service that financial asset for a fee that is included in, for example, a servicing contract. The entity assesses the servicing contract in accordance with the guidance in paragraphs 42C and B30 to decide whether the entity has continuing involvement as a result of the servicing contract for the purposes of the disclosure requirements. For example, a servicer will have continuing involvement in the transferred financial asset for the purposes of the disclosure requirements if the servicing fee is dependent on the amount or timing of the cash flows collected from the transferred financial asset. Similarly, a servicer has continuing involvement for the purposes of the disclosure requirements if a fixed fee would not be paid in full because of non-performance of the transferred financial asset. In these examples, the servicer has an interest in the future performance of the transferred financial asset. This assessment is independent of whether the fee to be received is expected to compensate the entity adequately for performing the servicing.

B31 Continuing involvement in a transferred financial asset may result from contractual

provisions in the transfer agreement or in a separate agreement with the transferee or a third party entered into in connection with the transfer.

Transferred financial assets that are not derecognised in their entirety (paragraph 42D)

B32 Paragraph 42D requires disclosures when part or all of the transferred financial assets

do not qualify for derecognition. Those disclosures are required at each reporting date at which the entity continues to recognise the transferred financial assets, regardless of when the transfers occurred.

Types of continuing involvement (paragraphs 42E–42H)

B33 Paragraphs 42E–42H require qualitative and quantitative disclosures for each type of

continuing involvement in derecognised financial assets. An entity shall aggregate its continuing involvement into types that are representative of the entity’s exposure to risks. For example, an entity may aggregate its continuing involvement by type of financial instrument (eg guarantees or call options) or by type of transfer (eg factoring of receivables, securitisations and securities lending).


Maturity analysis for undiscounted cash outflows to repurchase transferred assets (paragraph 42E(e))

B34 Paragraph 42E(e) requires an entity to disclose a maturity analysis of the

undiscounted cash outflows to repurchase derecognised financial assets or other amounts payable to the transferee in respect of the derecognised financial assets, showing the remaining contractual maturities of the entity’s continuing involvement. This analysis distinguishes cash flows that are required to be paid (eg forward contracts), cash flows that the entity may be required to pay (eg written put options) and cash flows that the entity might choose to pay (eg purchased call options).

B35 An entity shall use its judgement to determine an appropriate number of time bands in

preparing the maturity analysis required by paragraph 42E(e). For example, an entity might determine that the following maturity time bands are appropriate:

(a) not later than one month; (b) later than one month and not later than three months; (c) later than three months and not later than six months; (d) later than six months and not later than one year; (e) later than one year and not later than three years; (f) later than three years and not later than five years; and (g) more than five years.

B36 If there is a range of possible maturities, the cash flows are included on the basis of

the earliest date on which the entity can be required or is permitted to pay.

Qualitative information (paragraph 42E(f))

B37 The qualitative information required by paragraph 42E(f) includes a description of the

derecognised financial assets and the nature and purpose of the continuing involvement retained after transferring those assets. It also includes a description of the risks to which an entity is exposed, including:

(a) a description of how the entity manages the risk inherent in its continuing

involvement in the derecognised financial assets. (b) whether the entity is required to bear losses before other parties, and the

ranking and amounts of losses borne by parties whose interests rank lower than the entity’s interest in the asset (ie its continuing involvement in the asset).

(c) a description of any triggers associated with obligations to provide financial

support or to repurchase a transferred financial asset.

Gain or loss on derecognition (paragraph 42G(a)) B38 Paragraph 42G(a) requires an entity to disclose the gain or loss on derecognition

relating to financial assets in which the entity has continuing involvement. The entity shall disclose if a gain or loss on derecognition arose because the fair values of the components of the previously recognised asset (ie the interest in the asset derecognised and the interest retained by the entity) were different from the fair value of the previously recognised asset as a whole. In that situation, the entity shall also


disclose whether the fair value measurements included significant inputs that were not based on observable market data, as described in paragraph 27A.

Supplementary information (paragraph 42H) B39 The disclosures required in paragraphs 42D–42G may not be sufficient to meet the

disclosure objectives in paragraph 42B. If this is the case, the entity shall disclose whatever additional information is necessary to meet the disclosure objectives. The entity shall decide, in the light of its circumstances, how much additional information it needs to provide to satisfy the information needs of users and how much emphasis it places on different aspects of the additional information. It is necessary to strike a balance between burdening financial statements with excessive detail that may not assist users of financial statements and obscuring information as a result of too much aggregation.

Offsetting financial assets and financial liabilities (paragraphs 13A–13F)

Scope (paragraph 13A)

B40 The disclosures in paragraphs 13B–13E are required for all recognised financial instruments that are set off in accordance with paragraph 42 of HKAS 32. In addition, financial instruments are within the scope of the disclosure requirements in paragraphs 13B–13E if they are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments and transactions, irrespective of whether the financial instruments are set off in accordance with paragraph 42 of HKAS 32.

B41 The similar agreements referred to in paragraphs 13A and B40 include derivative clearing agreements, global master repurchase agreements, global master securities lending agreements, and any related rights to financial collateral. The similar financial instruments and transactions referred to in paragraph B40 include derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, securities borrowing, and securities lending agreements. Examples of financial instruments that are not within the scope of paragraph 13A are loans and customer deposits at the same institution (unless they are set off in the statement of financial position), and f inancial instruments that are subject only to a collateral agreement.

Disclosure of quantitative information for recognised financial assets and recognised financial liabilities within the scope of paragraph 13A (paragraph 13C)

B42 Financial instruments disclosed in accordance with paragraph 13C may be subject to different measurement requirements (for example, a payable related to a repurchase agreement may be measured at amortised cost, while a derivative will be measured at fair value). An entity shall include instruments at their recognised amounts and describe any resulting measurement differences in the related disclosures.

Disclosure of the gross amounts of recognised financial assets and recognised financial liabilities within the scope of paragraph 13A (paragraph 13C(a))

B43 The amounts required by paragraph 13C(a) relate to recognised financial instruments that are set off in accordance with paragraph 42 of HKAS 32. The amounts required by paragraph 13C(a) also relate to recognised financial instruments that are subject to an enforceable master netting arrangement or similar agreement irrespective of whether they meet the offsetting criteria. However, the disclosures required by paragraph 13C(a) do not relate to any amounts recognised as a result of collateral agreements


that do not meet the offsetting criteria in paragraph 42 of HKAS 32. Instead, such amounts are required to be disclosed in accordance with paragraph 13C(d).

Disclosure of the amounts that are set off in accordance with the criteria in paragraph 42 of HKAS 32 (paragraph 13C(b))

B44 Paragraph 13C(b) requires that entities disclose the amounts set off in accordance with paragraph 42 of HKAS 32 when determining the net amounts presented in the statement of financial position. The amounts of both the recognised financial assets and the recognised financial liabilities that are subject to set-off under the same arrangement will be disclosed in both the financial asset and financial liability disclosures. However, the amounts disclosed (in, for example, a table) are limited to the amounts that are subject to set-off. For example, an entity may have a recognised derivative asset and a recognised derivative liability that meet the offsetting criteria in paragraph 42 of HKAS 32. If the gross amount of the derivative asset is larger than the gross amount of the derivative liability, the financial asset disclosure table will include the entire amount of the derivative asset (in accordance with paragraph 13C(a)) and the entire amount of the derivative liability (in accordance with paragraph 13C(b)). However, while the financial liability disclosure table will include the entire amount of the derivative liability (in accordance with paragraph 13C(a)), it will only include the amount of the derivative asset (in accordance with paragraph 13C(b)) that is equal to the amount of the derivative liability.

Disclosure of the net amounts presented in the statement of financial position (paragraph 13C(c))

B45 If an entity has instruments that meet the scope of these disclosures (as specified in paragraph 13A), but that do not meet the offsetting criteria in paragraph 42 of HKAS 32, the amounts required to be disclosed by paragraph 13C(c) would equal the amounts required to be disclosed by paragraph 13C(a).

B46 The amounts required to be disclosed by paragraph 13C(c) must be reconciled to the individual line item amounts presented in the statement of financial position. For example, if an entity determines that the aggregation or disaggregation of individual financial statement line item amounts provides more relevant information, it must reconcile the aggregated or disaggregated amounts disclosed in paragraph 13C(c) back to the individual line item amounts presented in the statement of financial position.

Disclosure of the amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in paragraph 13C(b) (paragraph 13C(d))

B47 Paragraph 13C(d) requires that entities disclose amounts that are subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in paragraph 13C(b). Paragraph 13C(d)(i) refers to amounts related to recognised financial instruments that do not meet some or all of the offsetting criteria in paragraph 42 of HKAS 32 (for example, current rights of set-off that do not meet the criterion in paragraph 42(b) of HKAS 32, or conditional rights of set-off that are enforceable and exercisable only in the event of default, or only in the event of insolvency or bankruptcy of any of the counterparties).

B48 Paragraph 13C(d)(ii) refers to amounts related to financial collateral, including cash collateral, both received and pledged. An entity shall disclose the fair value of those financial instruments that have been pledged or received as collateral. The amounts disclosed in accordance with paragraph 13C(d)(ii) should relate to the actual collateral received or pledged and not to any resulting payables or receivables recognised to return or receive back such collateral.


Limits on the amounts disclosed in paragraph 13C(d) (paragraph 13D)

B49 When disclosing amounts in accordance with paragraph 13C(d), an entity must take into account the effects of over-collateralisation by financial instrument. To do so, the entity must first deduct the amounts disclosed in accordance with paragraph 13C(d)(i) from the amount disclosed in accordance with paragraph 13C(c). The entity shall then limit the amounts disclosed in accordance with paragraph 13C(d)(ii) to the remaining amount in paragraph 13C(c) for the related financial instrument. However, if rights to collateral can be enforced across financial instruments, such rights can be included in the disclosure provided in accordance with paragraph 13D.

Description of the rights of set-off subject to enforceable master netting arrangements and similar agreements (paragraph 13E)

B50 An entity shall describe the types of rights of set-off and similar arrangements disclosed in accordance with paragraph 13C(d), including the nature of those rights. For example, an entity shall describe its conditional rights. For instruments subject to rights of set-off that are not contingent on a future event but that do not meet the remaining criteria in paragraph 42 of HKAS 32, the entity shall describe the reason(s) why the criteria are not met. For any financial collateral received or pledged, the entity shall describe the terms of the collateral agreement (for example, when the collateral is restricted).

Disclosure by type of financial instrument or by counterparty

B51 The quantitative disclosures required by paragraph 13C(a)–(e) may be grouped by type of financial instrument or transaction (for example, derivatives, repurchase and reverse repurchase agreements or securities borrowing and securities lending agreements).

B52 Alternatively, an entity may group the quantitative disclosures required by paragraph 13C(a)–(c) by type of financial instrument, and the quantitative disclosures required by paragraph 13C(c)–(e) by counterparty. If an entity provides the required information by counterparty, the entity is not required to identify the counterparties by name. However, designation of counterparties (Counterparty A, Counterparty B, Counterparty C, etc) shall remain consistent from year to year for the years presented to maintain comparability. Qualitative disclosures shall be considered so that further information can be given about the types of counterparties. When disclosure of the amounts in paragraph 13C(c)–(e) is provided by counterparty, amounts that are individually significant in terms of total counterparty amounts shall be separately disclosed and the remaining individually insignificant counterparty amounts shall be aggregated into one line item.

Other

B53 The specific disclosures required by paragraphs 13C–13E are minimum requirements. To meet the objective in paragraph 13B an entity may need to supplement them with additional (qualitative) disclosures, depending on the terms of the enforceable master netting arrangements and related agreements, including the nature of the rights of set-off, and their effect or potential effect on the entity’s financial position.


Appendix C Amendments to other HKFRSs

The amendments in this appendix shall be applied for annual periods beginning on or after 1 January 2007. If an entity applies the HKFRS for an earlier period, these amendments shall be applied for that earlier period.

* * *

The amendments contained in this appendix when this Standard was issued have been incorporated into the relevant Standards.


Disclosures

Basis for Conclusions on Hong Kong Financial Reporting Standard 7

HKFRS 7 BC Revised December 2016September 2018

© Copyright 2 HKFRS 7 BC (September 2018)

Basis for Conclusions HKFRS 7 Financial Instruments: Disclosures

HKFRS 7 is based on IFRS 7 Financial Instruments: Disclosures. In approving HKFRS 7, the Council of the Hong Kong Institute of Certified Public Accountants considered and agreed with the IASB’s Basis for Conclusions on IFRS 7. Accordingly, there are no significant differences between HKFRS 7 and IFRS 7. The IASB’s Basis for Conclusions is reproduced below. The paragraph numbers of IFRS 7 referred to below generally correspond with those in HKFRS 7.

CONTENTS

from paragraph

BASIS FOR CONCLUSIONS ON

IFRS 7 FINANCIAL INSTRUMENTS: DISCLOSURES

INTRODUCTION BC1

SCOPE BC6

The entities to which the IFRS applies BC6

Exemptions considered by the Board BC9

Insurers BC9

Small and medium-sized entities BC10

Subsidiaries BC11

DISCLOSURES ABOUT THE SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR FINANCIAL POSITION AND PERFORMANCE

BC12

The principle BC13

Balance sheet disclosures BC14

Categories of financial assets and financial liabilities BC14


BC16

Reclassification BC23

Offsetting financial assets and financial liabilities BC24A

Background BC24A

Scope BC24F

Disclosure of quantitative information for recognised financial assets and recognised financial liabilities within the scope of paragraph 13A

BC24O

Disclosure of the net amounts presented in the statement of financial position BC24P

Disclosure of the amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in paragraph 13C(b) BC24Q

Limits on the amounts disclosed in paragraph 13C(d) BC24S

Disclosure by type of financial instrument or by counterparty BC24T

Other considerations BC24X

Collateral BC25


Allowance account for credit losses BC26


BC28

Defaults and breaches BC32

Income statement and equity BC33

Items of income, expenses, gains or losses BC33

Fee income and expense BC35

Other disclosure—Hedge Accounting BC35A

Other disclosures—fair value BC36

DISCLOSURES ABOUT THE NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS

BC40

Interaction between qualitative and quantitative disclosures BC42A

Location of disclosures of risks arising from financial instruments BC43

Quantitative disclosures BC47

Information based on how the entity manages risk BC47

Information on averages BC48

Credit risk BC48A9

Maximum exposure to credit risk BC49

Collateral held as security and other credit enhancements BC51

Credit quality of financial assets that are neither past due nor impaired

BC54

Financial assets with renegotiated terms BC54A

Financial assets that are either past due or impaired BC55

Collateral and other credit enhancements obtained BC56

Liquidity risk BC57

Market risk BC59

Operational risk BC65

DISCLOSURES RELATING TO TRANSFERS OF FINANCIAL ASSETS BC65A

Background BC65A


BC65E

Transferred financial assets that are derecognised in their entirety BC65I

EFFECTIVE DATE AND TRANSITION BC66

APPLICABILITY OF THE OFFSETTING AMENDMENTS TO IFRS 7 TO CONDENSED INTERIM FINANCIAL STATEMENTS

BC72B

SUMMARY OF MAIN CHANGES FROM THE EXPOSURE DRAFT BC73

APPENDIX

A Amendments to Basis for Conclusions on other IFRSs


Basis for Conclusions on IFRS 7 Financial Instruments: Disclosures

This Basis for Conclusions accompanies, but is not part of, IFRS 7.

In this Basis for Conclusions the terminology has not been amended to reflect the changes made by IAS 1 Presentation of Financial Statements (as revised in 2007).

The requirements of IAS 39 relating to classification and measurement of items within the scope of IAS 39 were relocated to IFRS 9 Financial Instruments, and IFRS 7 was amended accordingly. The text of this Basis for Conclusions has been amended for consistency with those changes.

Introduction

BC1 This Basis for Conclusions summarises the International Accounting Standards

Board’s considerations in reaching the conclusions in IFRS 7 Financial Instruments: Disclosures. Individual Board members gave greater weight to some factors than to others.

BC2 During the late 1990s, the need for a comprehensive review of IAS 30 Disclosures in

the Financial Statements of Banks and Similar Financial Institutions became apparent. The Board’s predecessor, the International Accounting Standards Committee (IASC), issued a number of Standards that addressed, more comprehensively, some of the topics previously addressed only for banks in IAS 30. Also, fundamental changes were taking place in the financial services industry and in the way in which financial institutions manage their activities and risk exposures. This made it increasingly difficult for users of banks’ financial statements to assess and compare their financial position and performance, their associated risk exposures, and their processes for measuring and managing those risks.

BC3 In 1999 IASC added a project to its agenda to revise IAS 30 and in 2000 it appointed a

steering committee. BC4 In 2001 the Board added this project to its agenda. To assist and advise it, the Board

retained the IAS 30 steering committee, renamed the Financial Activities Advisory Committee (FAAC), as an expert advisory group. FAAC members had experience and expertise in banks, finance companies and insurance companies and included auditors, financial analysts, preparers and regulators. The FAAC’s role was:

(a) to provide input from the perspective of preparers and auditors of financial

statements of entities that have significant exposures to financial instruments; and

(b) to assist the Board in developing a standard and implementation guidance for

risk disclosures arising from financial instruments and for other related disclosures.

BC5 The Board published its proposals in July 2004 as ED 7 Financial Instruments:

Disclosures. The deadline for comments was 27 October 2004. The Board received 105 comment letters. After reviewing the responses, the Board issued IFRS 7 in August 2005.

BC5A In October 2008 the Board published an exposure draft Improving Disclosures about

Financial Instruments (proposed amendments to IFRS 7). The aim of the proposed amendments was to enhance disclosures about fair value and liquidity risk. The Board received 89 comment letters. After reviewing the responses, the Board issued amendments to IFRS 7 in March 2009. The Board decided to require application of the amendments for periods beginning on or after 1 January 2009. The Board noted that,


although the effective date of IFRSs and amendments to IFRSs is usually 6–18 months after issue, the urgent need for enhanced disclosures about financial instruments demanded earlier application.

BC5B In January 2011 the IASB and the US national standard-setter, the Financial

Accounting Standards Board (FASB), published the exposure draft Offsetting Financial Assets and Financial Liabilities. This was in response to requests from users of financial statements and recommendations from the Financial Stability Board to achieve convergence of the boards’ requirements for offsetting financial assets and financial liabilities. The different requirements result in a significant difference between amounts presented in statements of financial position prepared in accordance with IFRSs and amounts presented in statements of financial position prepared in accordance with US GAAP, particularly for entities that have large amounts of derivative activities. The proposals in the exposure draft would have replaced the requirements for offsetting financial assets and financial liabilities and would have established a common approach with the FASB. After considering the responses to the exposure draft, the boards decided to maintain their respective offsetting models. However, to meet the needs of users of financial statements, the boards agreed jointly on additional disclosures to enable users of financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with an entity’s recognised financial assets and recognised financial liabilities, on the entity’s financial position. Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7) was issued in December 2011 and is effective for annual periods beginning on or after 1 January 2013 and interim periods within those annual periods.

Scope (paragraphs 3-5)

The entities to which the IFRS applies

BC6 Although IFRS 7 arose from a project to revise IAS 30 (a Standard that applied only to banks and similar financial institutions), it applies to all entities that have financial instruments. The Board observed that the reduction in regulatory barriers in many countries and increasing competition between banks, non-bank financial services firms, and financial conglomerates have resulted in many entities providing financial services that were traditionally provided only by entities regulated and supervised as banks. The Board concluded that this development would make it inappropriate to limit this project to banks and similar financial institutions.

BC7 The Board considered whether entities that undertake specified activities commonly

undertaken by banks and other financial institutions, namely deposit-taking, lending and securities activities, face unique risks that would require a standard specific to them. However, the Board decided that the scope of this project should include disclosures about risks arising from financial instruments in all entities for the following reasons:

(a) disclosures about risks associated with financial instruments are useful to

users of the financial statements of all entities. (b) the Board found it could not satisfactorily define deposit-taking, lending, and

securities activities. In particular, it could not satisfactorily differentiate an entity with securities activities from an entity holding a portfolio of financial assets for investment and liquidity management purposes.

(c) responses to the Exposure Draft of Improvements to IAS 32 Financial

Instruments: Disclosure and Presentation, published in June 2002, indicated that IAS 32’s risk disclosure requirements, applicable to all entities, could be improved.


(d) the exclusion of some financial instruments would increase the danger that

risk disclosures could be incomplete and possibly misleading. For example, a debt instrument issued by an entity could significantly affect its exposures to liquidity risk, interest rate risk and currency risk even if that instrument is not held as part of deposit-taking, lending and securities activities.

(e) users of financial statements need to be able to compare similar activities,

transactions and events of different entities on a consistent basis. Hence, the disclosure principles that apply to regulated entities should not differ from those that apply to non-regulated, but otherwise similar, entities.

BC8 The Board decided that the scope of the IFRS should be the same as that of IAS 32

with one exception. The Board concluded that the IFRS should not apply to derivatives based on interests in subsidiaries, associates or joint ventures if the derivatives meet the definition of an equity instrument in IAS 32. This is because equity instruments are not remeasured and hence:

(a) they do not expose the issuer to balance sheet and income statement risk;

and (b) the disclosures about the significance of financial instruments for financial

position and performance are not relevant to equity instruments.

Although these instruments are excluded from the scope of IFRS 7, they are within the scope of IAS 32 for the purpose of determining whether they meet the definition of equity instruments.

Exemptions considered by the Board Insurers

BC9 The Board considered whether the IFRS should apply to entities that both have financial instruments and issue insurance contracts. The Board did not exempt these entities because financial instruments expose all entities to risks regardless of what other assets and liabilities they have. Accordingly, an entity that both issues insurance contracts and has financial instruments applies IFRS 4 Insurance Contracts to its insurance contracts and IFRS 7 to its financial assets and financial liabilities. However, many of the disclosure requirements in IFRS 4 were applications of, or relatively straightforward analogies with, existing requirements in IAS 32. Therefore, the Board also updated the disclosures required by IFRS 4 to make them consistent with IFRS 7, with modifications that reflect the interim nature of IFRS 4.

Small and medium-sized entities

BC10 The Board considered whether it should exempt small and medium-sized entities from

the scope of the IFRS. The Board noted that the extent of disclosures required by the IFRS will depend on the extent to which the entity uses financial instruments and the extent to which it has assumed associated risks. The IFRS requires entities with few financial instruments and few risks to give few disclosures. Also, many of the requirements in the IFRS are based on information provided internally to the entity’s key management personnel. This helps to avoid unduly onerous requirements that would not be appropriate for smaller entities. Accordingly, the Board decided not to exempt such entities from the scope of IFRS 7. However, it will keep this decision under review in its project on financial reporting for small and medium-sized entities.


Subsidiaries

BC11 Some respondents to ED 7 stated that there is little public interest in the financial

statements of some entities, such as a wholly-owned subsidiary whose parent issues publicly available financial statements. These respondents stated that such subsidiaries should be exempt from some of the requirements of IFRS 7 in their individual financial statements. However, deciding whether such an entity should prepare general purpose financial statements is a matter for the entity and local legislators and regulators. If such an entity prepares financial statements in accordance with IFRSs, users of those statements should receive information of the same quality as users of any general purpose financial statements prepared in accordance with IFRSs. The Board confirmed its view that no exemptions from the general requirements of any Standard should be given for the financial statements of subsidiaries.

Disclosures about the significance of financial instruments for financial position and performance (paragraphs 7-30, B4 and B5)1

BC12 The Board relocated disclosures from IAS 32 to IFRS 7, so that all disclosure

requirements for financial instruments are in one Standard. Many of the disclosure requirements about the significance of financial instruments for an entity’s financial position and performance were previously in IAS 32. For these disclosures, the relevant paragraphs from the Basis for Conclusions on IAS 32 have been incorporated into this Basis for Conclusions. This Basis for Conclusions does not discuss requirements that the Board did not reconsider either in revising IAS 32 in 2003 or in developing IFRS 7.

The principle (paragraph 7) BC13 The Board decided that the disclosure requirements of IFRS 7 should result from the

explicit disclosure principle in paragraph 7. The Board also decided to specify disclosures to satisfy this principle. In the Board’s view, entities could not satisfy the principle in paragraph 7 unless they disclose the information required by paragraphs 8-30.

Balance sheet disclosures (paragraphs 8-19 and B4)2 Categories of financial assets and financial liabilities (paragraph 8)

BC14 Paragraph 8 requires entities to disclose financial assets and financial liabilities by the measurement categories in IAS 39 IFRS 9 Financial Instruments: Recognition and Measurement. The Board concluded that the disclosures for each measurement category would assist users in understanding the extent to which accounting policies affect the amounts at which financial assets and financial liabilities are recognised.

BC15 The Board also concluded that separate disclosure of the carrying amounts of

financial assets and financial liabilities that are classified as held for trading and those designated upon initial recognition as financial assets and financial liabilities at fair value through profit or loss and those mandatorily measured at fair value is useful because such designation is at the discretion of the entity.

1 IFRS 9 Financial Instruments deleted paragraph B4 of IFRS 7.



Financial assets or financial liabilities at fair value through profit or loss (paragraphs 9-11, B4 and B5)

3

BC16 IAS 39 IFRS 9 permits entities to designate a non-derivative financial liability as at fair

value through profit or loss, if specified conditions are met. If entities do so, they are required to provide the disclosures in paragraphs 10 and 11. The Board’s reasons for these disclosures are set out in the Basis for Conclusions on IAS 39 IFRS 9, paragraphs BC87-BC92 BCZ5.29-BCZ5.34.

BC17 The requirements in paragraphs 9, 11 and B5(a) are related to the Amendments to

IAS 39 Financial Instruments: Recognition and Measurement―The Fair Value Option, issued in June 2005.

4 The reasons for those requirements are discussed in the Basis

for Conclusions on those Amendments. BC18 Paragraph 10(a) requires disclosure of the change in fair value of a financial liability

designated as at fair value through profit or loss that is attributable to changes in the liability’s credit risk. The Board previously considered this disclosure in its deliberations on the fair value measurement of financial liabilities in IAS 39.

BC19 Although quantifying such changes might be difficult in practice, the Board concluded

that disclosure of such information would be useful to users of financial statements and would help alleviate concerns that users may misinterpret the profit or loss effects of changes in credit risk, especially in the absence of disclosures. Therefore, in finalising the revisions to IAS 32 in 2003, it decided to require disclosure of the change in fair value of the financial liability that is not attributable to changes in a benchmark interest rate. The Board believed that this is often a reasonable proxy for the change in fair value that is attributable to changes in the liability’s credit risk, in particular when such changes are large, and would provide users with information with which to understand the profit or loss effect of such a change in credit risk.

BC20 However, some respondents to ED 7 stated that they did not agree that the IAS 32

disclosure provided a reasonable proxy, except for straightforward debt instruments. In particular, there could be other factors involved in the change in an instrument’s fair value unrelated to the benchmark interest rate, such as the effect of an embedded derivative. Respondents also cited difficulties for unit-linked insurance contracts, for which the amount of the liability reflects the performance of a defined pool of assets. The Board noted that the proxy that was developed in IAS 32 assumed that it is not practicable for entities to determine directly the change in fair value arising from changes in credit risk. However, the Board acknowledged and shared these concerns.

BC21 As a result, the Board amended this requirement to focus directly on the objective of

providing information about the effects of changes in credit risk:

(a) by permitting entities to provide a more faithful representation of the amount of change in fair value that is attributable to changes in credit risk if they could do so. However, such entities are also required to disclose the methods used and provide their justification for concluding that those methods give a more faithful representation than the proxy in paragraph 10(a)(i).

(b) by amending the proxy disclosure to be the amount of change in fair value that

is not attributable to changes in market conditions that give rise to market risk. For example, some entities may be able to identify part of the change in the fair value of the liability as attributable to a change in an index. In these cases, the proxy disclosure would exclude the amount of change attributable to a change in an index. Similarly, excluding the amount attributable to a change in an internal or external investment fund makes the proxy more suitable for unit-linked insurance contracts.


4 IFRS 9 Financial Instruments replaced IAS 39. IFRS 9 applies to all items that were previously within the scope of

IAS 39. This paragraph refers to matters relevant when IFRS 7 was issued.


BC22 The Board decided that when an entity has designated a financial liability as at fair value

through profit or loss, it should disclose the difference between the carrying amount and the amount the entity would contractually be required to pay at maturity to the holders of the liability (see paragraph 10(b)). The fair value may differ significantly from the settlement amount, in particular for financial liabilities with a long duration when an entity has experienced a significant deterioration in creditworthiness since their issue. The Board concluded that knowledge of this difference would be useful to users of financial statements. Also, the settlement amount is important to some financial statement users, particularly creditors.

Reclassification (paragraphs 12 and 12AB-12D)

BC23 IAS 32 required disclosure of the reason for reclassification of financial assets at cost or

amortised cost rather than at fair value. The Board extended this requirement to include disclosure of the reason for reclassifications and of the amount reclassified into and out of each category. As noted in paragraph BC14, the Board regards such information as useful because the categorisation of financial instruments has a significant effect on their measurement.

BC23A In October and November 2008 the Board amended IAS 39

5 to permit reclassification of

particular financial assets in some circumstances. The Board decided to require additional disclosures about the situations in which any such reclassification is made, and the effects on the financial statements. The Board regards such information as useful because the reclassification of a financial asset can have a significant effect on the financial statements.

BC23B The Board issued the requirements relating to the reclassification of financial assets in IFRS 9

Financial Instruments and revised accordingly the disclosure requirements relating to the reclassification of financial assets.

BC24 [Deleted]

Offsetting financial assets and financial liabilities

Background

BC24A Following requests from users of financial statements and recommendations from the Financial Stability Board, in June 2010 the IASB and the FASB added a project to their respective agendas to improve and potentially achieve convergence of the requirements for offsetting financial assets and financial liabilities. The different requirements result in a significant difference between amounts presented in statements of financial position prepared in accordance with IFRSs and amounts presented in statements of financial position prepared in accordance with US GAAP, particularly for entities that have large amounts of derivative activities.

BC24B Consequently, in January 2011 the IASB and the FASB published the exposure draft Offsetting Financial Assets and Financial Liabilities. The exposure draft proposed common offsetting requirements for IFRSs and US GAAP and proposed disclosures about financial assets and financial liabilities that are subject to rights of set-off and related arrangements.

BC24C Most respondents to the exposure draft supported the boards’ efforts towards achieving convergence, but their responses to the proposals varied. Many IFRS preparers agreed with the proposals, stating that the underlying principle and proposed criteria were similar to those in IAS 32 and reflect an entity’s credit and liquidity exposure to such instruments. Some US GAAP preparers indicated that offsetting in the statement of financial position in accordance with the proposed criteria provided more relevant information than the current model, except for derivatives and repurchase or reverse repurchase agreements.

5 IFRS 9 Financial Instruments replaced IAS 39. IFRS 9 applies to all items that were previously within the scope of IAS 39.

This paragraph refers to matters relevant when IFRS 7 was issued.


BC24D There was no consensus among users of financial statements regarding if, or when, to present gross or net information in the statement of financial position. However, there was consensus that both gross and net information are useful and necessary for analysing financial statements. Users of financial statements supported achieving convergence of the IFRS and US GAAP requirements, and also supported improving disclosures so that financial statements prepared in accordance with IFRSs and US GAAP would be more comparable. Comparable information is important to investors for calculating their ratios and performing their analyses.

BC24E As a result of the feedback received on the exposure draft, the IASB and the FASB decided to maintain their respective offsetting models. However, the boards noted that requiring common disclosures of gross and net amounts of recognised financial instruments that are (a) set off in the statement of financial position and (b) subject to enforceable master netting arrangements and similar agreements, even if not set off in the statement of financial position, would be helpful for users of financial statements. Accordingly, the boards agreed on common disclosure requirements by amending and finalising the disclosures initially proposed in the exposure draft.

Scope (paragraph 13A)

BC24F The disclosures in the exposure draft would have applied to all recognised financial assets and recognised financial liabilities subject to a right of set-off, and/or for which an entity had either received or pledged cash or other financial instruments as collateral.

BC24G Respondents to the exposure draft noted that paragraphs 14, 15 and 36(b) of IFRS 7 already require disclosures of financial instrument collateral received and pledged and other credit enhancements. US GAAP has similar disclosure requirements. Consequently, if an entity has no financial assets or financial liabilities subject to a right of set-off (other than collateral agreements or credit enhancements), the boards concluded that there would be no incremental value in providing additional disclosure information for such instruments.

BC24H For example, some respondents were concerned that providing disclosure of conditional rights to set off loans and customer deposits at the same financial institution would be a significant operational burden. Such rights are often a result of statute, and entities do not typically manage their credit risk related to such amounts based on these rights of set-off. In addition, entities that have contractual rights to set off customer deposits with loans only in situations such as events of default see these rights as a credit enhancement and not as the primary source of credit mitigation. Respondents argued that the cost of including these amounts in the amended disclosures would outweigh the benefit because users of financial statements did not request information related to these instruments when discussing the offsetting disclosure requirements.

BC24I The boards agreed and decided to limit the scope of the disclosures to all financial instruments that meet the boards’ respective offsetting models and recognised financial assets and recognised financial liabilities that are subject to an enforceable master netting arrangement or a similar agreement. The boards specifically excluded loans and customer deposits with the same financial institution from the scope of these requirements (except in the limited cases when the respective offsetting model is satisfied). This reduced scope still responds to the needs of users of financial statements for information about amounts that have been set off in accordance with IFRSs and amounts that have been set off in accordance with US GAAP. The types of instruments that fall within the scope of these disclosures include the instruments that cause significant differences between amounts presented in statements of financial position prepared in accordance with IFRSs and amounts presented in statements of financial position prepared in accordance with US GAAP.


BC24J If there is an associated collateral agreement for such instruments, an entity would disclose amounts subject to such agreements in order to provide full information about its exposure in the normal course of business, as well as in the events of default and insolvency or bankruptcy.

BC24K Other respondents requested that the scope of the proposed disclosures be further amended to exclude financial instruments for which the lender has the right to set off the related non-financial collateral in the event of default. Although non-financial collateral agreements may exist for some financial instruments, those preparers do not necessarily manage the credit risk related to such financial instruments on the basis of the non-financial collateral held.

BC24L The disclosures focus on the effects of recognised financial instruments and financial instrument set-off agreements on an entity’s financial position. The boards also noted that a comprehensive reconsideration of credit risk disclosures was not within the scope of this project. They therefore restricted the scope of the disclosures to exclude financial instruments with rights of set-off only for non-financial collateral.

BC24M A few respondents were concerned that the proposals seem to be designed for financial institutions and would impose requirements on non-financial institutions. They questioned the benefit that such disclosures would provide to investors in non-financial entities.

BC24N Although the boards acknowledged that financial institutions would be among those most affected, they did not agree that the disclosures are only relevant for financial institutions. Other industries have similar financial instrument activities and use enforceable master netting arrangements and similar agreements to mitigate exposure to credit risks. Consequently, the boards concluded that the required disclosures provide useful information about an entity’s arrangements, irrespective of the nature of the entity’s business.

Disclosure of quantitative information for recognised financial assets and recognised financial liabilities within the scope of paragraph 13A (paragraph 13C)

BC24O The boards understood that recognised financial instruments included in the disclosure requirements in paragraph 13C of IFRS 7 may be subject to different measurement requirements. For example, a payable related to a repurchase agreement may be measured at amortised cost, while a derivative asset or derivative liability subject to the same disclosure requirements (for example, in paragraph 13C(a) of IFRS 7) will be measured at fair value. In addition, the fair value amount of any financial instrument collateral received or pledged and subject to paragraph 13C(d)(ii) of IFRS 7 should be included in the disclosures to provide users of financial statements with the best information about an entity’s exposure. Consequently, a financial asset or financial liability disclosure table may include financial instruments measured at different amounts. To provide users of financial statements with the information they need to evaluate the amounts disclosed in accordance with paragraph 13C of IFRS 7, the boards decided that an entity should describe any resulting measurement differences in the related disclosures.

Disclosure of the net amounts presented in the statement of financial position (paragraph 13C(c))

BC24P When providing feedback on the proposals in the exposure draft, users of financial statements emphasised that information in the notes should be clearly reconciled back to the amounts in the statement of financial position. The boards therefore decided that if an entity determines that the aggregation or disaggregation of individual financial statement line item amounts provides more relevant information when


disclosing amounts in accordance with paragraph 13C of IFRS 7, the entity must still reconcile the amounts disclosed in paragraph 13C(c) of IFRS 7 back to the individual line item amounts in the statement of financial position.

Disclosure of the amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in paragraph 13C(b) (paragraph 13C(d))

BC24Q Paragraph 13C(d)(i) of IFRS 7 requires disclosure of amounts related to recognised financial instruments that do not meet some or all of the offsetting criteria in paragraph 42 of IAS 32. This may include current rights of set-off that do not meet the criterion in paragraph 42(b) of IAS 32, or conditional rights of set-off that are enforceable and exercisable only in the event of default, or only in the event of insolvency or bankruptcy of any of the counterparties. Although such rights do not qualify for set-off in accordance with IAS 32, users of financial statements are interested in arrangements that an entity has entered into that mitigate the entity’s exposure to such financial instruments in the normal course of business and/or in the events of default and insolvency or bankruptcy.

BC24R Paragraph 13C(d)(ii) of IFRS 7 requires disclosure of amounts of cash and financial instrument collateral (whether recognised or unrecognised) that do not meet the criteria for offsetting in the statement of financial position but that relate to financial instruments within the scope of these disclosure requirements. Depending on the terms of the collateral arrangement, collateral will often reduce an entity’s exposure in the events of default and insolvency or bankruptcy of a counterparty to the contract. Collateral received or pledged against financial assets and financial liabilities may often be liquidated immediately upon an event of default. Consequently, the boards concluded that the amounts of collateral that are not set off in the statement of financial position but that are associated with other netting arrangements should be included in the amounts disclosed as required by paragraph 13C(d)(ii) of IFRS 7.

Limits on the amounts disclosed in paragraph 13C(d) (paragraph 13D)

BC24S The boards concluded that an aggregate disclosure of the amount of cash collateral and/or the fair value of collateral in the form of other financial instruments would be misleading when some financial assets and financial liabilities are over-collateralised and others have insufficient collateral. To prevent an entity from inappropriately obscuring under-collateralised financial instruments with others that are over-collateralised, paragraph 13D of IFRS 7 restricts the amounts of cash and/or financial instrument collateral to be disclosed in respect of a recognised financial instrument to more accurately reflect an entity’s exposure. However, if rights to collateral can be enforced across financial instruments, such rights can be included in the disclosure provided in accordance with paragraph 13D of IFRS 7. At no point in time should under-collateralisation be obscured.

Disclosure by type of financial instrument or by counterparty

BC24T The exposure draft proposed disclosures by class of financial instrument. An entity would have been required to group financial assets and financial liabilities separately into classes that were appropriate to the nature of the information disclosed, taking into account the characteristics of those financial instruments and the applicable rights of set-off. Many preparers were concerned that the cost of disclosing amounts related to rights of set-off in the events of default and insolvency or bankruptcy by class of financial instrument would outweigh the benefit. They also indicated that they often manage credit exposure by counterparty and not necessarily by class of financial instrument.


BC24U Many users of financial statements indicated that disclosure of recognised amounts subject to enforceable master netting arrangements and similar agreements (including financial collateral) that were not set off in the statement of financial position would be useful irrespective of whether the amounts are disclosed by counterparty or by type or by class of financial instrument, as long as they can reconcile these amounts back to the statement of financial position. In evaluating whether the disclosures should be provided by type or by class of financial instrument or by counterparty, the boards noted that the objective of these disclosures (paragraph 13B of IFRS 7) is that an entity should disclose information to enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on the entity’s financial position.

BC24V The boards decided to reduce the burden on preparers by requiring disclosure by type of financial instrument rather than by class. Disclosure by type of financial instrument may (or may not) differ from the class of financial instrument used for other disclosures in IFRS 7, but is appropriate in circumstances where a difference would better achieve the objective of the disclosures required by these amendments. The boards also decided to provide flexibility as to whether the information required by paragraph 13C(c)–(e) of IFRS 7 is presented by type of financial instrument or by counterparty. This would allow preparers to present the disclosures in the same way that they manage their credit exposure.

BC24W The Board also noted that paragraph 31 of IFRS 7 requires an entity to disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period. In addition, paragraph 34 of IFRS 7 requires the disclosure of concentrations of risk for each type of risk. Consequently, the Board noted that, irrespective of whether the disclosures were required to be provided by type or by class of financial instrument or by counterparty, entities are already required to disclose information about risks and how they are managed, including information about concentrations of credit risk.

Other considerations

Reconciliation between IFRSs and US GAAP

BC24X Some users of financial statements asked for information to help them reconcile between the amounts set off in accordance with IFRSs and the amounts set off in accordance with US GAAP. The boards recognised that the amounts disclosed in accordance with paragraph 13C(b), (c) and (d) of IFRS 7 will probably be different for financial statements prepared in accordance with IFRSs and those prepared in accordance with US GAAP. However, the amounts disclosed in accordance with paragraph 13C(a) and (e) of IFRS 7 are generally not affected by the offsetting criteria applied in the statement of financial position. These amounts are important for users of financial statements to understand the effects of netting arrangements on an entity’s financial position in the normal course of business and in the events of default and insolvency or bankruptcy.

BC24Y Consequently, while the amended disclosure requirements do not directly reconcile the IFRS and US GAAP amounts, they provide both gross and net information on a comparable basis. The boards considered that requiring a full reconciliation between IFRSs and US GAAP was unnecessary, particularly given the relative costs and benefits. Such reconciliation would have required preparers to apply two sets of accounting requirements and to track any changes to the related accounting standards and to contracts in the related jurisdictions.


Tabular information

BC24Z The disclosures require amounts to be presented in a tabular format (ie a table) unless another format is more appropriate. The boards believe that a tabular format best conveys an overall understanding of the effect of any rights of set-off and other related arrangements on an entity’s financial position and improves the transparency of such information.

Transition and effective date

BC24AAThe boards identified two transition approaches in the exposure draft—prospective and retrospective.

BC24ABProspective transition is generally appropriate only in situations where it is not practicable to apply a standard to all prior periods. The boards did not believe that this was the case with the proposed disclosure requirements. Retrospective transition would require an entity to apply the new requirements to all periods presented. This would maximise consistency of financial information between periods. Retrospective transition would enable analysis and understanding of comparative accounting information among entities. In addition, the scope of the disclosures was reduced and the disclosures amended to require less detailed information than originally proposed, which would make them less burdensome for preparers to apply retrospectively.

BC24AC The exposure draft did not propose an effective date, but instead asked respondents for information about the time and effort that would be involved in implementing the proposed requirements. The boards indicated that they would use such feedback, as well as the responses in their Request for Views on Effective Dates and Transition Methods, and the timing of other planned accounting and reporting standards, to determine an appropriate effective date for the proposals in the exposure draft.

BC24AD Some respondents suggested that the offsetting proposals should have the same effective date as the other components of the IASB’s project to replace IAS 39 with IFRS 9 Financial Instruments. If an earlier date was required, it was suggested that application should be restricted only to the accounting period being presented, rather than providing comparative information, because of the potential burden of applying the proposed disclosure requirements.

BC24AEAt the time the amended disclosure requirements were issued (December 2011), IFRS 9 was not yet mandatorily effective. However, the Board did not believe that the IFRS 9 project would change the offsetting disclosures. Aligning the effective date of these amendments with the effective date of the financial instruments project could result in postponing the effective date of the common disclosure requirements, which would mean a delay in providing users of financial statements the information that they need. For users of financial statements to benefit from the increased comparability, and because the offsetting and IFRS 9 projects are independent of one another, the boards decided that common disclosures should be effective as early as possible.

BC24AF In addition, the boards did not think that a long transition period was needed, because the amended disclosures had a reduced scope and less detailed information than originally proposed in the exposure draft and were related to the presentation of instruments that entities have already recognised and measured. The boards therefore decided that the effective date for the amended disclosures should be for annual periods beginning on or after 1 January 2013, and interim periods within those annual periods.

BC24AG As described in greater detail in other sections of this Basis for Conclusions, the disclosures required by paragraphs 13B–13E of IFRS 7 are a result of requests from users of financial statements for information to enable them to compare statements of financial position prepared in accordance with IFRSs with statements of financial


position prepared in accordance with US GAAP, particularly for entities that have large amounts of derivative activities.

BC24AH The information required in paragraphs 13B–13E of IFRS 7 will enable users of financial statements to evaluate the effect or potential effect of netting arrangements, including rights of set-off associated with an entity’s recognised financial assets and recognised financial liabilities, on the entity’s financial position for financial statements presented in accordance with IFRSs and those presented in accordance with US GAAP.

BC24AI The Board noted that paragraph 10(f) of IAS 1 Presentation of Financial Statements requires an entity to provide a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. In the case of Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7), because the change relates only to disclosures and there is no associated change in accounting policy, or a resulting restatement or reclassification, it was noted that paragraph 10(f) of IAS 1 does not apply for these amendments to IFRS 7.

Cost-benefit considerations

BC24AJ Before issuing an IFRS or an amendment to an IFRS, the Board seeks to ensure that it will meet a significant need and that the overall benefits of the resulting information justify the costs of providing it. As described in greater detail in other sections of this Basis for Conclusions on Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7), the Board considered that there is significant benefit to market participants in providing these disclosures. The disclosures address a significant difference between the amounts presented in statements of financial position prepared in accordance with IFRSs and amounts presented in statements of financial position prepared in accordance with US GAAP, particularly for entities that have large amounts of derivative activities. The disclosures therefore make the amounts presented in accordance with both sets of standards more comparable.

BC24AKDuring redeliberations, the Board considered feedback related to the costs of providing the disclosures proposed in the exposure draft. As described in greater detail in other sections of this Basis for Conclusions, the Board decided to limit the scope of the disclosures because these changes would reduce the cost to preparers while still providing the information that users of financial statements had requested.

BC24AL On the basis of the considerations described in the Basis for Conclusions on these amendments, and summarised in paragraphs BC24AJ and BC24AK, the Board concluded that the benefits of Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7) outweigh the costs to preparers of applying these amendments.

Collateral (paragraphs 14 and 15)

BC25 Paragraph 15 requires disclosures about collateral that the entity holds if it is permitted

to sell or repledge the collateral in the absence of default by the owner. Some respondents to ED 7 argued for an exemption from this disclosure if it is impracticable to obtain the fair value of the collateral held. However, the Board concluded that it is reasonable to expect an entity to know the fair value of collateral that it holds and can sell even if there is no default.


Allowance account for credit losses (paragraph 16)6

BC26 When a separate account is used to record impairment losses (such as an allowance

account or similar account used to record a collective impairment of assets), paragraph 16 requires a reconciliation of that account to be disclosed. The Board was informed that analysts and other users find this information useful in assessing the adequacy of the allowance for impairment losses for such entities and when comparing one entity with another. However, the Board decided not to specify the components of the reconciliation. This allows entities flexibility in determining the most appropriate format for their needs.

BC27 Respondents to ED 7 asked the Board to require entities to provide equivalent

information if they do not use an allowance account. The Board decided not to add this disclosure in finalising the IFRS. It concluded that, for virtually all entities, IAS 39’s requirement to consider impairment on a group basis would necessitate the use of an allowance or similar account. The accounting policy disclosures required by paragraph B5(d) also include information about the use of direct adjustments to carrying amounts of financial assets.


(paragraph 17)

BC28 IAS 32 requires the separation of the liability and equity components of a compound

financial instrument. The Board notes that this is more complicated for compound financial instruments with multiple embedded derivative features whose values are interdependent (for example, a convertible debt instrument that gives the issuer a right to call the instrument back from the holder, or the holder a right to put the instrument back to the issuer) than for those without such features. If the embedded equity and non-equity derivative features are interdependent, the sum of the separately determined values of the liability and equity components will not equal the value of the compound financial instrument as a whole.

BC29 For example, the values of an embedded call option feature and an equity conversion

option feature in a callable convertible debt instrument depend in part on each other if the holder’s equity conversion option is extinguished when the entity exercises the call option or vice versa. The following diagram illustrates the joint value arising from the interaction between a call option and an equity conversion option in a callable convertible bond. Circle L represents the value of the liability component, ie the value of the straight debt and the embedded call option on the straight debt, and Circle E represents the value of the equity component, ie the equity conversion option on the straight debt. The total area of the two circles represents the value of the callable convertible bond. The difference between the value of the callable convertible bond as a whole and the sum of the separately determined values for the liability and equity components is the joint value attributable to the interdependence between the call option feature and the equity conversion feature. It is represented by the intersection between the two circles.

6 IFRS 9 Financial Instruments replaced IAS 39. IFRS 9 applies to all items that were previously within the scope of

IAS 39. This paragraph refers to matters relevant when IFRS 7 was issued.


BC30 Under the approach in IAS 32, the joint value attributable to the interdependence between multiple embedded derivative features is included in the liability component. A numerical example is set out as Illustrative Example 10 accompanying IAS 32.

BC31 Even though this approach is consistent with the definition of equity as a residual

interest, the Board recognises that the allocation of the joint value to either the liability component or the equity component is arbitrary because it is, by its nature, joint. Therefore, the Board concluded that it is important to disclose the existence of issued compound financial instruments with multiple embedded derivative features that have interdependent values. Such disclosure highlights the effect of multiple embedded derivative features on the amounts recognised as liabilities and equity.

Defaults and breaches (paragraphs 18 and 19)

BC32 Paragraphs 18 and 19 require disclosures about defaults and breaches of loans payable and other loan agreements. The Board concluded that such disclosures provide relevant information about the entity’s creditworthiness and its prospects of obtaining future loans.

Income statement and equity (paragraph 20) Items of income, expenses, gains or losses (paragraph 20(a))

BC33 Paragraph 20(a) requires disclosure of income statement gains and losses by the measurement classifications in IAS 39 IFRS 9 (which complement the balance sheet disclosure requirement described in paragraph BC14). The Board concluded that the disclosure is needed for users to understand the financial performance of an entity’s financial instruments, given the different measurement bases in IAS 39IFRS 9.

BC34 Some entities include interest and dividend income in gains and losses on financial

assets and financial liabilities held for trading measured at fair value through profit or loss and others do not. To assist users in comparing income arising from financial instruments across different entities, the Board decided that an entity should disclose how the income statement amounts are determined. For example, an entity should disclose whether net gains and losses on financial assets or financial liabilities held for trading measured at fair value through profit or loss include interest and dividend income (see Appendix B, paragraph B5(e)).

Fee income and expense (paragraph 20(c))

BC35 Paragraph 20(c) requires disclosure of fee income and expense (other than amounts included in determining the effective interest rate) arising from financial assets or financial liabilities and from trust and other fiduciary activities that result in the entity holding or placing assets on behalf of individuals, trusts, retirement benefit plans, and other institutions. This information indicates the level of such activities and helps users to estimate possible future income of the entity.

L E


Other disclosures—hedge accounting

BC35A The Board divided its project to replace IAS 39 into three phases. As the Board

completed each phase, it deleted the relevant portions in IAS 39 and replaced it with chapters in IFRS 9. The third phase of the project to replace IAS 39 related to hedge accounting. As a consequence of the decisions the Board made when it replaced the hedge accounting guidance in IAS 39, the Board also considered changes to the disclosure requirements related to hedge accounting contained in IFRS 7.

BC35B During its deliberations, the Board engaged in outreach activities with users of

financial statements. This outreach included soliciting views on presentation and disclosures. The Board used the responses received from those outreach activities to develop the proposed hedge accounting disclosures.

BC35C The Board was told that many users did not find the hedge accounting disclosures in

financial statements helpful. Many also think that the hedge accounting disclosures that were originally in IFRS 7 did not provide transparency on an entity’s hedging activities.

BC35D To provide relevant information that enhances the transparency on an entity’s hedging

activities, the Board proposes hedge accounting disclosures that meet particular objectives. Clear disclosure objectives allow an entity to apply its judgement when it provides information that is useful and relevant to users of financial statements.

BC35E The following sub-sections set out the Board’s considerations regarding the proposed

hedge accounting disclosures.

General considerations Scope of the hedge accounting disclosures

BC35F An entity might enter into a transaction to manage an exposure to a particular risk that

might not qualify for hedge accounting (for various reasons), for example, an item that is not eligible to be designated as a hedged item or hedging instrument. Information on such transactions might enable users to understand why an entity has entered into a transaction and how it manages the particular risk, even though those transactions do not qualify for hedge accounting.

BC35G However, the Board thought that mandating such disclosures would require it to

determine the part of an entity’s risk management that was relevant for the purpose of this disclosure and then define that part to make the disclosure requirement operational. The Board did not believe that this would be feasible as part of its hedge accounting project as it requires a much wider scope because the disclosures would not depend on the accounting treatment.

BC35H Furthermore, users of financial statements can often obtain information on an entity’s

hedging activities from information in management reports and sources outside the financial reporting context. That often gives a reasonable overview of why hedge accounting might be difficult to achieve. Consequently, the Board decided not to propose in its 2010 Exposure Draft Hedge Accounting (the ‘2010 Hedge Accounting Exposure Draft’) disclosures about hedging when hedge accounting does not apply.

BC35I Most respondents to the 2010 Hedge Accounting Exposure Draft agreed with the

Board’s proposed scope for hedge accounting disclosures (ie to provide information about risk exposures that an entity hedges and for which hedge accounting is applied). However, some did raise concerns about the potential lack of information that will be available to users of financial statements about those risk exposures an entity hedges but for which hedge accounting is not applied.


BC35J The Board noted that IFRS 7 requires entities to provide qualitative and quantitative disclosure about the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period and how those risks are being managed. The Board believes that, as part of these disclosures, entities would provide information for users of financial statements to understand how it manages risk exposures for which hedge accounting is not applied.

BC35K Consequently, the Board decided to retain the scope of the hedge accounting

disclosures as proposed in the 2010 Hedge Accounting Exposure Draft, that is, to provide information to users of financial statements on exposures that an entity hedges and for which hedge accounting is applied.

Location of disclosures

BC35L The Board decided that all hedge accounting disclosures should be presented in one location within an entity’s financial statements. However, if such information is already presented elsewhere the Board decided that, in order to avoid duplication, an entity should be allowed to incorporate that information by cross-reference, which is similar to the approach used by IFRS 7 for some disclosures that can be incorporated by reference. The Board thinks that the information will be more transparent and easier to understand if it is presented in one location within the entity’s financial statements.

Disclosures by risk category

BC35M The Board noted that recognition and measurement requirements allow for only a

partial reflection of the economic hedging activities in the financial statements, which results in a limitation of an entity’s reporting of its hedging activities. Hence, the Board considered that the transparency of an entity’s hedging activities could be enhanced by an approach that considers:

(a) information that provides a clear picture of those risk management activities of

an entity that are captured by hedge accounting (this information is not necessarily provided in the primary financial statements); and

(b) information that is included in the primary financial statements.

BC35N To provide information that is useful to users of financial statements, there should be a

clear link between the hedge accounting information that is outside the primary financial statements and the hedge accounting within those. To provide such a link, the Board decided that an entity should provide hedge accounting disclosures by risk category. Consequently, an entity should disclose by risk category:

(a) information that is not included in the primary financial statements (see

paragraphs BC35P–BC35BB); and (b) information that is included in the primary financial statements (see

paragraphs BC35CC–BC35SS). BC35O The Board decided not to prescribe the risk categories by which the disclosures need

to be disaggregated. In the Board’s view an entity should apply judgement and categorise risks on the basis of how it manages its risks through hedging. For example, an entity manages its floating interest rate risk using interest rate swaps (to change it to a fixed interest rate) for some hedging relationships (cash flow hedges), while it also uses cross-currency interest rate swaps to manage both the floating interest rate and foreign exchange risk of other hedging relationships (cash flow hedges). Consequently, the entity would have one risk category for floating interest rate risk and another risk category for foreign exchange risk combined with floating interest rate risk. However, an entity should apply its risk categories consistently throughout all the proposed hedge accounting disclosures.


The risk management strategy

BC35P Users of financial statements need to understand how an entity’s risk management

strategy is applied. Understanding an entity’s risk management strategy for each risk helps users to understand the accounting information disclosed.

BC35Q Consequently, in its 2010 Hedge Accounting Exposure Draft, the Board proposed that

an entity should provide an explanation of its risk management strategy for each category of risk.

BC35R Most respondents to the 2010 Hedge Accounting Exposure Draft agreed with this

proposal. However, some raised concerns that the 2010 Hedge Accounting Exposure Draft was not clear enough on how much detail should be provided by entities to comply with the disclosure requirement.

BC35S The Board noted that an entity will identify and ultimately describe their risk

management strategies based on how it manages risk. Because entities manage risk in different ways, the Board did not think that users of financial statements would necessarily understand an entity’s risk management strategy if it required a specific list of information to be disclosed. Instead, the Board decided to add additional guidance on the type of information that should be included in a risk management description.

The amount, timing and uncertainty of future cash flows

BC35T The Board decided that, in order to meet the objectives of hedge accounting

disclosures, an entity would have to provide sufficient quantitative information to help users of financial statements understand how its risk management strategy for each particular risk affects the amount, timing and uncertainty of future cash flows. In this context, risk exposure refers only to risks that the entity has decided to hedge and for which hedge accounting is applied.

BC35U Consequently, in its 2010 Hedge Accounting Exposure Draft, the Board proposed that

an entity should provide:

(a) quantitative information on the risk exposure that the entity manages and the extent to which the entity hedges that exposure; and

(b) a breakdown of that information for each future period that a hedging

relationship (which exists at the reporting date) covers.

BC35V The Board also proposed that an entity should disclose information about the sources of hedge ineffectiveness of hedging relationships for each particular risk category. In the Board’s view this would assist users in identifying the reasons for hedge ineffectiveness that is recognised in profit or loss. It would also help users to determine how hedging relationships will affect profit or loss.

BC35W Most respondents disagreed with the Board’s proposal to require entities to disclose

information on the risk exposure and the hedged rate. They commented that this would result in the disclosure of commercially sensitive information (ie the risk exposure and the hedged rate). They believed that those who do not elect to apply hedge accounting would potentially have an unfair advantage because although they do not have to disclose anything, they could nonetheless gain insight into their competitor’s hedge positions. Commercial sensitivity was also of concern to those entities whose competitors are not listed companies or who do not report under IFRSs.

BC35X The Board noted that the proposal in the 2010 Hedge Accounting Exposure Draft

focused on the hedged risk (ie the hedged item). Consequently, it would result in disclosures about forward looking information and the rates at which future


transactions are hedged. The Board acknowledged that this would potentially provide competitors with insight into an entity’s costing structure. Consequently, the Board decided not to require information to be disclosed about the total risk exposure because of the potential forward looking nature of this information. The Board also decided to change the focus of the proposed disclosure from the hedged item to the hedging instrument. In other words, the disclosure would require information on some of the terms and conditions of the hedging instrument to be provided. The Board believes that this information will still be relevant and useful for users of financial statements in inferring the exposure that an entity is exposed to and what the effects will be on future cash flows as a result of how the entity manages the particular risk.

BC35Y The Board also discussed situations in which an entity uses a ‘dynamic’ hedging

process, ie a situation in which entities assess their overall exposure to a particular risk and then designate hedging relationships for constantly evolving exposures that require frequent discontinuations and restarts of hedging relationships. This is particularly the case for hedges of open portfolios. The Board noted that, because the general hedge accounting model allows hedge accounting for hedges of groups and net positions in relation to closed portfolios, entities need to use a ‘dynamic’ hedging process for an open portfolio. This means that entities designate hedging relationships for an open portfolio as if it were a closed portfolio for a short period and at the end of that period look at the open portfolio as the next closed portfolio for another short period. The dynamic nature of this process involves frequent discontinuations and restarts of hedging relationships.

BC35Z The Board considered that, in those circumstances, providing information about the

terms and conditions of the hedging instruments would not be useful given that the hedging instruments are part of a particular hedging relationship for only a short period at a time and are then designated into a new hedging relationship or left undesignated. In contrast, the disclosure requirement related to the terms and conditions of the hedging instrument was designed to provide information for situations in which an entity hedges a risk that remains broadly the same over the entire hedged period. Consequently, the Board decided to exempt entities from the requirement to disclose the terms and conditions of the hedging instruments in situations in which they use a ‘dynamic’ hedging process that involves frequent discontinuations and restarts of hedging relationships.

BC35AAThe Board was of the view that it was more important for users to understand why

entities use hedge accounting in the context of ‘dynamic’ hedging processes than to provide users with information about the terms and conditions of a hedging instrument that is part of a hedging relationship for only a short period at a time (and the designation of which changes frequently). Consequently, the Board decided that, in such circumstances, an entity should expand its discussion of the risk management strategy by providing the following information about how the entity uses hedge accounting to reflect its risk management strategy:

(a) information about what the ultimate risk management strategy is (for the

dynamic hedging process); (b) a description of how it reflects its risk management strategy by using hedge

accounting and designating the particular hedging relationships; and (c) an indication of how frequently the hedging relationships are discontinued and

restarted as part of the dynamic hedging process. BC35BBThe Board also noted that, because the designated hedging relationships change

frequently, the specific relationships at the reporting date might not be representative of the normal volumes during the period. The Board therefore decided to require entities to disclose when the volumes at the reporting date are unrepresentative of normal volumes during the period (similar to the disclosure requirement on sensitivity analyses for market risk in paragraph 42).


BC35CCOne function of hedge accounting is to mitigate the recognition and measurement

anomalies between the accounting for hedging instruments and the accounting for hedged items. Hedge accounting disclosures should therefore increase the transparency of how an entity has mitigated these recognition and measurement anomalies. Doing so will help users identify how hedge accounting has affected the entity’s statement of profit or loss and other comprehensive income and statement of financial position.

The effects of hedge accounting on financial position and performance

BC35DDTo provide information on the effects of hedge accounting on the statement of profit

or loss and other comprehensive income and the statement of financial position, the Board proposed disclosures that should be presented in a tabular format that separates the information by risk category and by type of hedge. Providing disclosures in a tabular format allows users to identify clearly the relevant numbers and their effects on the entity’s statement of profit or loss and other comprehensive income and statement of financial position.

BC35EEDuring the Board’s initial outreach, users said that they do not analyse an entity’s

hedging activities by type of hedging relationship (for example, a cash flow hedge or a fair value hedge). They said that it is more important to understand the risks that the entity manages and the results after hedging. However, to provide information effectively on the effects of hedge accounting on the statement of profit or loss and other comprehensive income and the statement of financial position, the information should reflect the accounting that was applied (for example, cash flow hedge accounting or fair value hedge accounting). The Board believed that if the proposed table is prepared by risk category and by type of hedge, the table would provide sufficient links between the accounting information and the risk management information.

BC35FFThe Board did not propose prescribing levels of aggregation or disaggregation for the

information that should be disclosed in a tabular format. An entity should apply judgement when it determines the appropriate level of aggregation or disaggregation. However, the Board proposed that an entity should consider other disclosure requirements in IFRS 7 when it considers the appropriate level of aggregation or disaggregation. For example, users should be able to take amounts that are disclosed and measured at fair value and make comparisons between the fair value disclosures and the proposed hedge accounting disclosures.

BC35GGCash flow hedge accounting requires an entity to defer gains or losses on the

hedging instrument in other comprehensive income. The deferred amounts are reflected in the statement of changes in equity in the cash flow hedge reserve. IAS 1 requires an entity to prepare a reconciliation for each component of equity between the carrying amount at the beginning and at the end of the period. In conformity with its objectives for hedge accounting disclosures, the Board proposed that the reconciliation required by IAS 1 should have the same level of detail as the information that identifies the effects of hedge accounting on the statement of profit or loss and other comprehensive income. The Board also proposed that the reconciliation should be by type of risk. The Board considered that such a disclosure would allow users of financial statements to evaluate the effects of hedge accounting on equity and the statement of profit or loss and other comprehensive income.

BC35HHMany respondents to the 2010 Hedge Accounting Exposure Draft agreed with the

Board’s proposal to explain the effects of hedge accounting disclosures using a tabular disclosure format. However, some respondents raised concerns that the proposal seems too prescriptive. Some also commented that they did not think that the tabular disclosure, as proposed, provided a clear enough link between hedged items and hedging instruments for the purpose of explaining hedge ineffectiveness. A few respondents also commented that the disclosures did not allow them to differentiate


between financial instruments that have been designated as hedging instruments and those that have not. These respondents believe that it is helpful to understand the purpose and effect of financial instruments if their designation is made clear through disclosures.

BC35II The Board thinks that providing a tabular disclosure format separated by type of hedge

(ie fair value hedges or cash flow hedge), risk category and by risk management strategy provides a sufficient link between the accounting information and the risk management information.

BC35JJ The Board did not propose any more specific format other than requiring information to

be disclosed in a tabular format. The Board thought that entities should have the freedom to present the disclosures that require a tabular format however they feel is best in order to provide users with the most useful information.

BC35KKWhile the 2010 Hedge Accounting Exposure Draft was open for public comment, the

Board issued IFRS 13 Fair Value Measurement. As a consequence of issuing that IFRS, the Board moved the fair value disclosures in IFRS 7 to IFRS 13. To improve the usefulness of the hedge accounting disclosures, the Board decided to require entities to use the same level of aggregation or disaggregation it used for other IFRS 7 or IFRS 13 disclosures related to the same underlying information.

BC35LL In its redeliberations of the 2010 Hedge Accounting Exposure Draft, the Board also

considered a disclosure that would allow understanding how the hedge ineffectiveness that is recognised in the statement of comprehensive income relates to the changes in the values of the hedging instruments and the hedged items. The Board decided to require disclosure of the change in fair value of the hedging instruments and the change in the value of the hedged items on the basis that is used to calculate the hedge ineffectiveness that is recognised in the statement of comprehensive income. Those are the changes in value during the period (after taking into account the effect of the ‘lower of’ test for cash flow hedges and hedges of a net investment in a foreign operation). This means that the difference between the amount included in the table for hedged items and the amount included in the table for hedging instruments equals the hedge ineffectiveness recognised in the statement of comprehensive income.

BC35MMThe Board also did not think that it was necessary to provide a specific disclosure

that indicates which financial instruments have been designated as hedging instruments and which have not. The Board thought that such a disclosure would provide potentially misleading information to users of financial statements. This is because users of financial statements might think that all financial instruments not designated as hedging instruments might be held for speculative purposes. This is not necessarily the case. Entities might hold financial instruments for hedging purposes but may decide not to elect hedge accounting. In addition to this, the Board thought that, because entities need to provide the information that requires a tabular format based on the same level of aggregation or disaggregation as in IFRS 13, users of financial statements should be able to identify the financial instruments not designated as hedging instruments by simply comparing the disclosures with each other. In addition, users should be able to understand how an entity manages the risks it is exposed to as a result of financial instruments using the disclosure requirements in IFRS 7 that are not related to the hedge accounting disclosures.

Time value of options accumulated through other comprehensive income

BC35NNThe Board proposed accounting requirements that involve other comprehensive

income for the time value of an option when an entity elects to separate the time value of the option and designate (as the hedging instrument) only its intrinsic value. Consequently, the Board also considered disclosures regarding the amounts that would be recognised in other comprehensive income under these proposals.


BC35OOThe Board noted that IAS 1 requires an entity to prepare a reconciliation for each component of equity between the carrying amount at the beginning and at the end of the period. Consequently, as a result of IAS 1, an entity would disclose the amounts in relation to the time value of options that would be accumulated in other comprehensive income and the movements in that balance.

BC35PPHowever, in its 2010 Hedge Accounting Exposure Draft, the Board proposed that an

entity should differentiate between transaction related hedged items and time-period related hedged items when providing the reconciliation of the accumulated other comprehensive income. This disaggregation would provide additional information about what cumulative amount in other comprehensive income would become an expense item over time and what amount would be transferred when a particular transaction occurs.

BC35QQMost respondents agreed with the Board’s proposal and consequently, the Board

decided to retain the proposal from its 2010 Hedge Accounting Exposure Draft. However, as a consequence of the Board’s decision to also allow an alternative accounting treatment for forward elements and foreign currency basis spreads, the Board also required that for the purpose of the IAS 1, amounts recognised in accumulated other comprehensive income that relate to forward elements and foreign currency basis spreads should be reconciled separately from amounts in relation to time value of options.

Hedging credit risk using credit derivatives

BC35RRFor situations in which entities hedge credit risk using credit derivatives the Board

decided to mitigate accounting mismatches in relation to credit derivatives accounted for at fair value through profit or loss by also using fair value through profit or loss accounting for the hedged credit exposure. Consequently, the Board also considered disclosures to provide transparency when entities apply that accounting.

BC35SSThe Board considered that the following information would be useful for

understanding the accounting in such situations:

(a) a reconciliation of amounts at the beginning and end of the period for the nominal amount and for the fair value of the credit derivatives;

(b) the gain or loss recognised in profit or loss as a result of changing the

accounting for a credit exposure to fair value through profit or loss; and (c) when an entity discontinues fair value through profit or loss accounting for

credit exposures, the fair value that becomes the new deemed cost or amortisable amount (for loan commitments) and the related nominal or principal amount.

Other disclosures—fair value (paragraphs 25-30)7

BC36 Many entities use fair value information internally in determining their overall financial position and in making decisions about individual financial instruments. It is also relevant to many decisions made by users of financial statements because, in many circumstances, it reflects the judgement of the financial markets about the present value of expected future cash flows relating to an instrument. Fair value information permits comparisons of financial instruments having substantially the same economic characteristics, regardless of why they are held and when and by whom they were issued or acquired. Fair values provide a neutral basis for assessing management’s stewardship by indicating the effects of its decisions to buy, sell or hold financial assets and to incur, maintain or discharge financial liabilities. The Board decided that

7 IFRS 13 Fair Value Measurement, issued in May 2011, defines fair value and contains requirements for measuring

fair value and for disclosing information about fair value measurements. As a consequence paragraphs 27-27B of IFRS 7 have been deleted.


when an entity does not measure a financial asset or financial liability in its balance sheet at fair value, it should provide fair value information through supplementary disclosures to assist users to compare entities on a consistent basis.

BC37 Disclosure of fair value is not required for investments in unquoted equity instruments

8

and derivatives linked to such equity instruments if their fair value cannot be measured reliably.

9 Similarly, IFRS 4 does not specify the accounting required for contracts

containing a discretionary participation feature pending phase II of the Board’s project on insurance contracts. Accordingly, disclosure of fair value is not required for contracts containing a discretionary participation feature, if the fair value of that feature cannot be measured reliably. For all other financial assets and financial liabilities, it is reasonable to expect that fair value can be determined with sufficient reliability within constraints of timeliness and cost. Therefore, the Board concluded that there should be no other exception from the requirement to disclose fair value information for financial assets or financial liabilities.

BC38 To provide users of financial statements with a sense of the potential variability of fair

value estimates, the Board decided that information about the use of valuation techniques should be disclosed, in particular the sensitivities of fair value estimates to the main valuation assumptions.

10 In forming this conclusion, the Board considered

the view that disclosure of sensitivities could be difficult, particularly when there are many assumptions to which the disclosure would apply and these assumptions are interdependent. However, the Board noted that a detailed quantitative disclosure of sensitivity to all assumptions is not required (only those that could result in a significantly different estimate of fair value are required) and that the disclosure does not require the entity to reflect interdependencies between assumptions when making the disclosure. Additionally, the Board considered whether this disclosure might imply that a fair value established by a valuation technique is less reliable than one established by other means. However, the Board noted that fair values estimated by valuation techniques are more subjective than those established from an observable market price, and concluded that users need information to help them assess the extent of this subjectivity.

BC39 Paragraph 28 requires disclosure about the difference that arises if the transaction

price differs from the fair value of a financial instrument that is determined in accordance with paragraph AG76 of IAS 39B5.4.8 of IFRS 9.

11 Those disclosures

relate to matters addressed in the December 2004 amendment to IAS 39 Transition and Initial Recognition of Financial Assets and Financial Liabilities. That amendment does not specify how entities should account for those initial differences in subsequent periods. The disclosures required by paragraph 28 inform users about the amount of gain or loss that will be recognised in profit or loss in future periods. The Board noted that the information required to provide these disclosures would be readily available to the entities affected.

BC39A Statement of Financial Accounting Standards No. 157 Fair Value Measurements

(SFAS 157) issued by the US Financial Accounting Standards Board requires disclosures that are based on a three-level fair value hierarchy for the inputs used in valuation techniques to measure fair value. The Board was asked by some users of financial statements to include similar disclosure requirements in IFRS 7 to provide more information about the relative reliability of the inputs to fair value measurements. The Board concluded that such a hierarchy would improve comparability between

8 IFRS 13, issued in May 2011, defines a Level 1 input as a quoted price in an active market for an identical asset or

liability. Level 2 inputs include quoted prices for identical assets or liabilities in markets that are not active. As a result IAS 39 and IFRS 9 refer to such equity instruments as 'an equity instrument that does not have a quoted price in an active market for an identical instrument (ie a Level 1 input)'.

9 IFRS 9 changed the measurement requirements for investments in equity instruments.

10 IFRS 13, issued in May 2011, resulted in paragraph 27B(c) of IFRS 7 being deleted.

11 IFRS 13, issued in May 2011, contains the requirements for measuring fair value. As a consequence of issuing that IFRS, paragraph B5.4.8 of IFRS 9 was deleted. However, in 2014 the requirements for amortised cost measurement and impairment were added to IFRS 9 as Sections 5.4 and 5.5. Paragraph B5.4.8 of IFRS 9 now contains requirements related to amortised cost measurement.


entities about the effects of fair value measurements as well as increase the convergence of IFRSs and US generally accepted accounting principles (GAAP). Therefore, the Board decided to require disclosures for financial instruments on the basis of a fair value hierarchy.

12

BC39B Because its own fair value measurement project was not yet completed, the Board

decided not to propose a fair value hierarchy for measurement, but only for disclosures. The fair value hierarchy for disclosures is the same as that in SFAS 157 but uses IFRS language pending completion of the fair value measurement project. Although the implicit fair value hierarchy for measurement in IAS 39 IFRS 9 is different from the fair value hierarchy in SFAS 157, the Board recognised the importance of using a three-level hierarchy for disclosures that is the same as that in SFAS 157.

13

BC39C The Board noted the following three-level measurement hierarchy implicit in IAS 39

IFRS 9:

(a) financial instruments quoted in an active market; (b) financial instruments whose fair value is evidenced by comparison with other

observable current market transactions in the same instrument (ie without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets; and

(c) financial instruments whose fair value is determined in whole or in part using a

valuation technique based on assumptions that are not supported by prices from observable current market transactions in the same instrument (ie without modification or repackaging) and not based on available observable market data.

BC39D For example, the Board acknowledged that some financial instruments that, for

measurement purposes, are considered to have an active market in accordance with paragraphs AG71–AG73 of IAS 39B5.4.3-B5.4.5 of IFRS 9 might be in Level 2 for disclosure purposes. Also, the application of paragraph AG76A of IAS 39B5.4.9 of IFRS 9 might result in no gain or loss being recognised on the initial recognition of a financial instrument that is in Level 2 for disclosure purposes.

14

BC39E The introduction of the fair value disclosure hierarchy does not affect any measurement

or recognition requirements of other standardsIFRSs. In particular, the Board noted that the recognition of gains or losses at inception of a financial instrument (as required by paragraph AG76 of IAS 39 B5.4.8 of IFRS 9

15) would not change as a result of the

fair value disclosure hierarchy. BC39F The Board decided to require additional disclosures for instruments with fair value

measurements that are in Level 3 of the fair value hierarchy.16

These disclosures

12 IFRS 13, issued in May 2011, contains a three-level fair value hierarchy for the inputs used in the valuation

techniques used to measure fair value and for the related disclosures. 13

IFRS 13, issued in May 2011, contains a three-level fair value hierarchy for the inputs used in the valuation techniques used to measure fair value and for the related disclosures. That hierarchy is identical to the hierarchy in Topic 820 Fair Value Measurement in the FASB Accounting Standards Codification

®, which codified SFAS 157.

14 IFRS 13, issued in May 2011, contains the requirements for measuring fair value. As a resultconsequence of

issuing that IFRS, paragraphs AG71-AG73 and paragraph AG76A of IAS 39 have been deleted. In addition, the requirements in paragraph AG76A have been relocated to paragraph AG76(b).B5.4.3-B5.4.5 of IFRS 9 were deleted and paragraph B5.4.9 of IFRS 9 was relocated to paragraphs B5.1.2A and B5.2.2A. However, in 2014 the requirements for amortised cost measurement and impairment were added to IFRS 9 as Sections 5.4 and 5.5. Paragraphs B5.4.3-B5.4.5 and paragraph B5.4.9 of IFRS 9 now contain requirements related to amortised cost measurement.

15 IFRS 13, issued in May 2011, contains the requirements for measuring fair value. As a consequence of issuing that IFRS, paragraph B5.4.8 of IFRS 9 was deleted. However, in 2014 the requirements for amortised cost measurement and impairment were added to IFRS 9 as Sections 5.4 and 5.5. Paragraph B5.4.8 of IFRS 9 now contains requirements related to amortised cost measurement.

16 IFRS 13, issued in May 2011, requires disclosures about fair value measurements. As a consequence paragraphs 27-27B of IFRS 7 have been deleted.


inform users of financial statements about the effects of those fair value measurements that use the most subjective inputs.

BC39G After reviewing comments received on the exposure draft, the Board decided not to

require disclosure by level of the fair value hierarchy for financial instruments that are not measured at fair value in the statement of financial position. The Board noted that paragraphs 25 and 27 of IFRS 7, which require the disclosure of the fair value of each class of assets and liabilities in a way that permits it to be compared with its carrying amount, and the methods and assumptions applied in determining fair values, were retained.

17

Disclosures about the nature and extent of risks arising from financial instruments (paragraphs 31-42 and B6-B28)

BC40 The Board was informed that users of financial statements value information about the

risks arising from financial instruments, such as credit risk, liquidity risk and market risk, to which entities are exposed, and the techniques used to identify, measure, monitor and control those risks. Therefore, the Board decided to require disclosure of this information. The Board also decided to balance two objectives:

(a) consistent requirements should apply to all entities so that users receive

comparable information about the risks to which entities are exposed. (b) the disclosures provided should depend on the extent of an entity’s use of

financial instruments and the extent to which it assumes associated risks. Entities with many financial instruments and related risks should provide more disclosure to communicate those risks to users of financial statements. Conversely, entities with few financial instruments and related risks may provide less extensive disclosure.

BC41 The Board decided to balance these two objectives by developing an IFRS that sets

out principles and minimum requirements applicable to all entities, supported by guidance on implementing the IFRS. The requirements in paragraphs 33-42 combine qualitative disclosures of the entity’s exposure to risks arising from financial instruments, and the way in which management views and manages these risks, with quantitative disclosures about material risks arising from financial instruments. The extent of disclosure depends on the extent of the entity’s exposure to risks arising from financial instruments. The guidance on implementing the IFRS illustrates how an entity might apply the IFRS. This guidance is consistent with the disclosure requirements for banks developed by the Basel Committee (known as Pillar 3), so that banks can prepare, and users receive, a single co-ordinated set of disclosures about financial risk.

BC42 The Board noted that because entities view and manage risk in different ways,

disclosures based on how an entity manages risk are unlikely to be comparable between entities. In addition, for an entity that undertakes limited management of risks arising from financial instruments, such disclosures would convey little or no information about the risks the entity has assumed. To overcome these limitations, the Board decided to specify disclosures about risk exposures applicable to all entities. These disclosures provide a common benchmark for financial statement users when comparing risk exposures across different entities and are expected to be relatively easy for entities to prepare. Entities with more developed risk management systems would provide more detailed information.

17 IFRS 13, issued in May 2011, resulted in paragraph 27 of IFRS 7 being deleted.


Interaction between qualitative and quantitative disclosures (paragraph 32A)

BC42A In Improvements to IFRSs issued in May 2010, the Board addressed a perceived lack

of clarity in the intended interaction between the qualitative and quantitative disclosures of the nature and extent of risks arising from financial instruments. The Board emphasised the interaction between qualitative and quantitative disclosures about the nature and extent of risks arising from financial instruments. This enables users to link related disclosures and hence form an overall picture of the nature and extent of risks arising from financial instruments. The Board concluded that an explicit emphasis on the interaction between qualitative and quantitative disclosures will contribute to disclosure of information in a way that better enables users to evaluate an entity’s exposure.

Location of disclosures of risks arising from financial instruments (paragraph B6)

BC43 Many respondents to ED 7 argued that disclosures about risks in paragraphs 31-42 should not be part of the financial statements for the following reasons:

(a) the information would be difficult and costly to audit. (b) the information is different from information generally included in financial

statements because it is subjective, forward-looking and based on management’s judgement. Thus, the information does not meet the criteria of comparability, faithful representation and completeness.

(c) inclusion of such information in a management commentary section outside

the financial statements would be consistent with practice in other jurisdictions, including the US. Having this information in the financial statements would put IFRS preparers at a disadvantage relative to their US peers.

BC44 Respondents raised concerns that the disclosure of sensitivity analysis in particular

should not be part of the financial statements. Respondents stated that sensitivity analysis cannot be prepared with the degree of reliability expected of information in the financial statements, and that the subjectivity in the sensitivity analysis and the hypothetical alternative values could undermine the credibility of the fair values recognised in the financial statements.

BC45 The Board considered whether the disclosures should be part of the information

provided by management outside the financial statements. The Board noted that respondents generally regarded the disclosures proposed in ED 7 as useful, even if they did not agree that they should be located in the financial statements. The Board’s view is that financial statements would be incomplete and potentially misleading without disclosures about risks arising from financial instruments. Hence, it concluded that such disclosures should be part of the financial statements. The Board rejected the argument that increased transparency puts an entity at a disadvantage; greater certainty on the part of investors can provide a significant advantage by lowering the entity’s cost of capital.

BC46 The Board also noted that some entities might prefer to present the information

required by the IFRS together with material such as a management commentary or risk report that is not part of the financial statements. Some entities might be required by regulatory authorities to provide in a separate report information similar to that required by the IFRS. Accordingly, the Board decided these disclosures should be given in the financial statements or incorporated by cross-reference from the financial statements to some other statement that is available to users of the financial statements on the same terms as the financial statements and at the same time.


Quantitative disclosures (paragraphs 34-42 and B7-B28)

Information based on how the entity manages risk (paragraphs 34 and B7)

BC47 The Board concluded that disclosures about an entity’s exposure to risks arising from

financial instruments should be required, and should be based on how the entity views and manages its risks, ie using the information provided to key management personnel (for example, its board of directors or chief executive officer). This approach:

(a) provides a useful insight into how the entity views and manages risk; (b) results in information that has more predictive value than information based

on assumptions and methods that management does not use, for instance, in considering the entity’s ability to react to adverse situations;

(c) is more effective in adapting to changes in risk measurement and

management techniques and developments in the external environment; (d) has practical advantages for preparers of financial statements, because it

allows them to use the data they use in managing risk; and (e) is consistent with the approach used in IAS 14 Segment Reporting.

18

BC47A In Improvements to IFRSs issued in May 2010, the Board removed the reference to

materiality from paragraph 34(b) of IFRS 7. The Board noted that the reference could imply that disclosures in IFRS 7 are required even if those disclosures are not material, which was not the Board’s intention.

Information on averages

BC48 The Board considered whether it should require quantitative information about average risk exposures during the period. It noted that information about averages is more informative if the risk exposure at the reporting date is not typical of the exposure during the period. However, information about averages is also more onerous to prepare. On balance, the Board decided to require disclosure of the exposures at the reporting date in all cases and to require additional information only if the information provided at the reporting date is unrepresentative of the entity’s exposure to risk during the period.

Credit risk (paragraphs 36-38, B9 and B10) Disclosure objectives

BC48A In developing the impairment disclosure requirements in this IFRS, the Board sought

to supplement the existing disclosures to meet the additional information needs of users of financial statements that will arise specifically from an impairment model based on expected credit losses. When relevant, the Board has considered the comments received on the disclosure requirements proposed in the original Exposure Draft Financial Instruments: Amortised Cost and Impairment (the ‘2009 Impairment Exposure Draft’) and the Board-only appendix to the Supplementary Document Financial Instruments: Impairment.

BC48B During the development of the expected credit loss requirements, the Board

acknowledged that any approach that attempts to reflect expected credit losses will be subject to measurement uncertainty and will place greater emphasis on management’s judgement and the quality of the information used.

18

In 2006 IAS 14 was replaced by IFRS 8 Operating Segments.


BC48C However, the Board believes that this level of judgement is necessary given the

differences in how entities approach credit risk management. The Board considered that information is useful and relevant when it enables users of financial statements to predict the likely amounts, timing and uncertainty of future cash flows. Accordingly, the Board identified three objectives for the disclosure requirements and this IFRS requires both qualitative and quantitative disclosures to assist users of financial statements to understand and identify:

(a) an entity’s credit risk management practices and how they relate to the

recognition and measurement of expected credit losses; (b) the amounts in the financial statements that arise from expected credit losses

that are measured in accordance with IFRS 9, including the changes in the estimate of expected credit losses and the reasons for the changes; and

(c) an entity’s credit risk profile (ie the credit risk inherent in an entity’s financial

instruments), including significant credit concentrations at the reporting date.

Credit risk management practices BC48D Requiring entities to estimate expected credit losses will increase the significance of

forecasts and the use of an entity’s judgement. In addition, IFRS 9 requires entities to incorporate new types of information into the measurement of expected credit losses as compared to IAS 39. In the Board’s view it is helpful for users of financial statements to understand the information entities use to estimate expected credit losses.

BC48E When developing the proposals in the 2013 Exposure Draft Financial Instruments:

Expected Credit Losses (the ‘2013 Impairment Exposure Draft’) the Board noted that disclosures about the methods, assumptions and information used to estimate expected credit losses have been a core part of the disclosure package since the 2009 Impairment Exposure Draft, and are important for understanding how an entity applies the expected credit loss requirements. However, the Board acknowledges that different entities will use different information and techniques for assessing whether they should recognise lifetime expected credit losses. The information and techniques that an entity uses will depend on the nature of its financial instruments and other factors.

BC48F The 2013 Impairment Exposure Draft acknowledged and permitted this. The Board

considered that to understand how an entity has applied the proposed expected credit loss requirements, the following information would be relevant and useful:

(a) how significant increases in credit risk are assessed and identified; (b) how default is defined and the reasons for selecting that definition; (c) how an entity assesses that financial assets are credit-impaired; and (d) the write-off policy applied.

BC48G Respondents to the 2013 Impairment Exposure Draft supported the disclosure of that qualitative information, with a few respondents requesting the disclosure of more qualitative information about the modification of financial instruments and how an entity has incorporated macroeconomic information in its estimates of expected credit losses.

BC48H As noted in paragraph BC5.252 of IFRS 9, the notion of default is fundamental to the

application of the impairment model, particularly because it affects the population that is subject to the 12-month expected credit loss measure. The Board noted during


redeliberations on the 2013 Impairment Exposure Draft that default can be interpreted in various ways, ranging from broad judgemental definitions based on qualitative factors to narrower non-judgemental definitions focusing only on non-payment. The appropriate definition also depends on the nature of the financial instrument in question. Given the various interpretations of default, the Board decided to require the disclosure of an entity’s definition of default and the reasons for its selection.

BC48I The Board considered that an explanation of how forward-looking information,

including macroeconomic information, has been incorporated in the measurement of expected credit losses would provide relevant and useful information, given the requirement in IFRS 9 to consider all reasonable and supportable information that is available without undue cost and effort when determining whether there has been a significant increase in credit risk since initial recognition. The Board also considered that an explanation of how an entity has applied the requirements in paragraph 5.5.12 of IFRS 9 for the modification of contractual cash flows of financial assets, including how an entity determines whether the credit risk of modified financial assets has improved so that is not considered to be significantly increased compared to initial recognition, would enhance the understanding of how an entity manages credit risk through modifications and restructurings.

BC48J The 2013 Impairment Exposure Draft proposed that an entity should disclose the

nominal amount of financial assets that have been written off but that are still subject to enforcement activity. This was included because feedback from users of financial statements indicated users would like to understand the extent to which recoveries of written off assets are still possible. The Board acknowledged this desire, however it determined that the disclosure of the aggregate amount of financial assets that have been written off but that remain subject to enforcement activity would not provide the most relevant information for this purpose. For example, the nominal amount could be very high (particularly as time passes, if the asset legally continues to accrue interest) even though the prospect of recovering any amounts outstanding might be extremely low. In addition, the Board received feedback from preparers that tracking these amounts for an extended period would be operationally burdensome. As a result, the Board decided to modify the disclosure and require that entities disclose the amount of financial assets that have been written off during the period, while narrative information is provided about financial assets that have previously been written off but that are still subject to enforcement activity.

BC48K The Board also proposed narrative disclosures to complement the quantitative

disclosures. In the Board’s view, users of financial statements would further benefit from a qualitative explanation of changes in estimates of expected credit losses. Estimates of expected credit losses may change, for example, because of changes in the volume of financial instruments, changes in overall market conditions or as a result of a significant event (for example, a sovereign debt crisis, weather-related events or other disasters). The disclosures should therefore include a qualitative narrative describing how significant events have affected the entity’s estimate of expected credit losses.

Financial instruments evaluated on an individual basis

BC48L Previously paragraph 37(b) of IFRS 7 required an analysis of financial instruments that

are individually determined to be credit-impaired as at the end of the reporting period, including an analysis of the factors that the entity considered when determining that those financial instruments are credit-impaired. Many entities already disclose the loan balance and loss allowance amount for both collectively and individually assessed credit-impaired loans. Consequently, the 2013 Impairment Exposure Draft proposed amendments to those requirements to limit them to financial instruments that an entity assesses individually for recognition of lifetime expected credit losses.

BC48M During outreach activities, users of financial statements noted that it is important for

them to understand which financial instruments an entity assesses on an individual


basis, especially when that individual assessment is because of an increase in credit risk and closer management of the instrument. While these financial instruments may not have experienced an increase in credit risk greater than those evaluated on a group basis, the Board concluded that this distinction helps users of financial statements to understand how an entity is monitoring and managing credit risk, so it is useful even when the difference is not attributable to differences in credit risk.

BC48N However, several respondents to the 2013 Impairment Exposure Draft argued that a

disclosure of the gross carrying amount of financial assets (and the amount recognised as a loss allowance for loan commitments and financial guarantee contracts) that are assessed on an individual basis is not relevant in an impairment model based on expected credit losses. These respondents argued that unlike in IAS 39, the loss allowance does not result from objective evidence of impairment on an individual asset.

BC48O The Board noted that conceptually, an assessment on an individual or collective basis

should render the same result. However, as noted in paragraph B5.5.2 of IFRS 9, an entity may not have access to reasonable and supportable information that enables it to identify significant increases in credit on an individual basis prior to financial assets becoming past due. Furthermore, an entity may only be able to incorporate forward-looking information in its estimates of expected credit losses on a collective basis. The Board therefore decided instead to require the disclosure of information about how an entity has grouped financial instruments if they are assessed or measured on a collective basis.

Amounts arising from expected credit losses

Reconciliation of the gross carrying amount and loss allowance

BC48P The Supplementary Document proposed the mandatory use of a loss allowance

account for credit losses, with separate disclosure of reconciliations for the two groups of financial assets that an entity would distinguish for the purpose of determining the loss allowance (ie assets in the ‘good book’ and assets in the ‘bad book’). Almost all respondents supported the mandatory use of a loss allowance account. Consequently, the 2013 Impairment Exposure Draft retained that proposal.

BC48Q The 2013 Impairment Exposure Draft also retained the proposal in the Supplementary

Document to show a reconciliation of the gross carrying amount of financial asset separately for each of the groups of financial assets that an entity would distinguish between for the purpose of determining the loss allowance (ie 12-month expected credit losses and lifetime expected credit losses) and each of the related loss allowances. Respondents (including preparers) generally supported disclosing a reconciliation (ie flow information) of changes in the loss allowance and stated that it was operational and useful. However, similar to the feedback received on the Supplementary Document, respondents to the 2013 Impairment Exposure Draft commented that showing separate reconciliations of the gross carrying amount of financial assets was onerous, especially when they were required to disclose the effect of the change of financial assets between those with loss allowances measured at amounts equal to 12-month and lifetime expected credit losses. They noted that when loss allowances are determined on a collective (ie portfolio) basis, an entity does not allocate loss allowances to individual financial assets. Preparers also stated that the costs associated with the disclosure, and any disclosure about flow information, would be substantial. In order to provide this information for open portfolios, an entity would be required to track changes in the credit risk of individual financial instruments and calculate the change in the loss allowance that results from new loans, derecognised assets, changes between 12-month and lifetime loss allowances and changes in estimates of credit losses. They noted that this would be contrary to the requirement in IFRS 9 which requires lifetime expected credit losses to be recognised even if a significant increase in credit risk cannot be identified on an individual financial instrument basis.


BC48R During outreach, users of financial statements have consistently and strongly

expressed the view that the change in the gross carrying amount of financial assets and the effect on the loss allowance are critical elements in understanding the credit quality of an entity’s financial instruments and its credit risk management practices. They held the view that the reconciliation of the gross carrying amount of financial instruments would greatly enhance transparency of an entity’s financial asset portfolio. While these disclosures would require systems changes and the cost of providing the information would be high, the Board noted that such reconciliations provide key information about movements between 12-month and lifetime loss allowances and about the causes of changes in expected credit losses and about the effect of changes in volume and credit quality.

BC48S The Board therefore decided to retain the requirement to provide a reconciliation of the

changes in the loss allowance. However, in the light of the feedback about the operational burden of reconciling the changes in the gross carrying amount of financial assets, the Board clarified that the objective of that reconciliation is to provide information about the key drivers for changes in the gross carrying amount to the extent that it contributes to changes in the loss allowance during the period. Examples of such key drivers for change could include new originations and purchases, deterioration of existing financial instruments resulting in the loss allowance changing to lifetime expected credit losses and financial assets being written off during the period. The Board also acknowledged that although the most relevant and useful information will be provided by disclosing the gross movements between loss allowance measurement categories, in some circumstances, or for some types of financial assets, information will be more useful if the movements are disclosed on a net basis (for example trade receivables accounted for in accordance with the general approach in IFRS 9).

Loan commitments and financial guarantee contracts

BC48T The 2013 Impairment Exposure Draft proposed that expected credit losses on loan

commitments and financial guarantee contracts should be recognised as a provision in the statement of financial position. The Board noted that it would be inappropriate to recognise a loss allowance for such financial instruments because there is no corresponding asset with which to present that loss allowance.

BC48U The Board noted feedback on the 2013 Impairment Exposure Draft that indicated that for

most loan commitments and financial guarantee contracts, entities estimate expected credit losses on an instrument (facility) level and are therefore not able to distinguish the expected credit losses related to the drawn component (the financial asset) and the undrawn component (the loan commitment). Consequently, it would not seem appropriate to attempt to allocate expected credit losses to each of these components for the purposes of presenting the loss allowance on each component separately and any allocation would probably be arbitrary.

BC48V The Board therefore decided that the loss allowance on a loan commitment or a financial

guarantee contract should be presented together with the loss allowance for expected credit losses on the associated financial asset, if an entity cannot separately identify the expected credit losses related to the separate components. To the extent that the amount of expected credit losses on a loan commitment or a financial guarantee contract exceeds the carrying amount of the associated financial asset recognised in the statement of financial position, the remaining balance should be presented as a provision.

Purchased or originated credit-impaired assets

BC48W The Board sought to enhance the comparability of financial assets that are

credit-impaired on initial recognition with those that are not. Consequently, the Board decided that an entity should disclose the undiscounted expected credit losses that are implicit in the pricing at initial recognition for purchased or originated credit-impaired financial assets. Users of financial statements have indicated that such


a disclosure would be helpful in alleviating some of the complexity in this area of accounting and would allow them to see the possible contractual cash flows that an entity could collect if there was a favourable change in expectations of credit losses for such assets.

Modifications

BC48X Throughout the Impairment project, users of financial statements have noted that an

area in which current disclosures and information is insufficient is that of restructurings and modifications. Particularly during the global financial crisis, users have expressed frustration at the difficulty of understanding the extent of restructuring activity that entities are undertaking in respect of their financial assets.

BC48Y The 2013 Impairment Exposure Draft proposed to require the disclosure of the gross

carrying amount of financial assets that have been modified during their life at a time when the loss allowance was measured at lifetime expected credit losses and for which the measurement of the loss allowance had subsequently changed back to 12-month expected credit losses. This proposed requirement resulted from users of financial statements requesting information to enable them to understand the amount of financial assets that have been modified and that have subsequently improved in credit quality. During redeliberations the Board noted operational concerns raised in feedback from preparers about the need to meet such a requirement by tracking individual financial assets, particularly even long after such assets have returned to a performing status and are no longer closely monitored for credit risk management purposes. The Board noted that the usefulness of the information would decrease over time as an increasing number of assets are required to be included in the disclosure. The Board therefore decided to limit the requirement to financial assets that have previously been modified at a time when the loss allowance was measured at lifetime expected credit losses and for which the loss allowance has changed back to 12-month expected credit losses during the reporting period.

BC48Z During redeliberations of the 2013 Impairment Exposure Draft the Board received

feedback that the modification guidance in IFRS 9 should be limited to modifications of credit-impaired assets or modifications undertaken for credit risk management purposes. The Board rejected these views and confirmed that the scope of this guidance applies to all modifications of contractual cash flows, regardless of the reason for the modification. In making this decision, the Board noted that an amortised cost carrying amount equates to the present value of the expected contractual cash flows, discounted at the effective interest rate. Consequently, the carrying amount should reflect changes in those contractual cash flows, irrespective of the reason for the modification occurring. In addition, it was noted that any change in contractual terms will have an impact on credit risk, even if small. Furthermore, the Board noted that it has been told previously that identifying those modifications that have been performed for credit risk management (ie non-commercial) purposes is operationally challenging. Consequently, the disclosures in paragraph 35K of IFRS 7 apply to all modifications of contractual cash flows.

Collateral and credit risk mitigation disclosures

BC48AACollateral and other credit risk mitigants are important factors in an entity’s estimate of

expected credit losses. For instance, an entity with more heavily collateralised loans will, all other things being equal, record a smaller loss allowance for credit losses than an entity with unsecured loans. The previous requirements of paragraph 36(b) of IFRS 7 required the disclosure of information similar to that proposed in the 2013 Impairment Exposure Draft. However, the Board received feedback that these collateral disclosures were too onerous and costly to prepare, and therefore proposed to limit the quantitative collateral disclosure requirements to those financial instruments that become credit-impaired subsequent to initial recognition.


BC48BBFeedback on the 2013 Impairment Exposure Draft indicated that respondents remained concerned about the disclosure of quantitative information about collateral for financial instruments that become credit-impaired subsequent to initial recognition. The Board maintained the view that information about the financial effect of collateral is useful. However, the Board noted that it did not intend to require providing information about the fair value of collateral. In addition, the Board decided that qualitative information should be disclosed about how collateral and other credit enhancements have been incorporated into the measurement of expected credit losses on all financial instruments.

Credit risk exposure

BC48CCBecause the recognition of lifetime expected credit losses is based on a significant

increase in credit risk since initial recognition, there could be a wide range of initial credit risk for which 12-month expected credit losses is recognised (for example, loans that are originated with a high credit risk but have not increased in credit risk subsequently would have a loss allowance based on 12-month expected credit losses as would high quality loans that have not significantly increased in credit risk since initial recognition). To provide users of financial statements with information about the changes in the loss allowance and the entity’s exposure to credit risk on financial instruments, the 2013 Impairment Exposure Draft proposed a disaggregation of the carrying amounts of financial instruments into credit risk categories, for both 12-month and lifetime expected credit losses.

BC48DDDisaggregating by credit risk shows the entity’s exposure to credit risk and its credit

risk profile at a given point in time (ie the reporting date). Users of financial statements indicated that they were concerned about the relative nature of the disclosure that is based on the range of credit risk relevant to the entity’s portfolio and that it would lack comparability as a result (ie a high risk for one entity may only be a medium risk for another). Furthermore, without vintage information, a user would not be able to determine whether changes in the risk profile are a result of changes in the credit risk of existing financial instruments or a result of the credit risk of new instruments recognised during the period. However, they believed that risk disaggregation would still provide insight into an entity’s exposure to credit risk and were therefore in favour of including it in the notes to the financial statements. The Board required the disclosure because changes in risk will affect the measurement of expected credit losses and it would therefore provide users of financial statements with information about the drivers of the change in the measurement. The Board also noted that this disclosure, particularly when considered together with the reconciliation of the gross carrying amount and loss allowance, provides relevant and useful information about credit risk migration and changes in overall credit risk over time.

BC48EEThe Board considered adding language to the proposed disclosure that would have

required an entity to reconcile this disclosure to internal credit rating grades. However, responses to the Supplementary Document considered this internal risk-rating information to be proprietary and therefore objected to this level of specificity. Consequently, the Board decided not to propose this reconciliation.

BC48FFSome respondents to the 2013 Impairment Exposure Draft also commented that the

disclosure was incompatible with the credit risk management practices for some asset classes and for non-financial entities, and noted that the disclosure should be aligned with an entity’s internal credit risk approach. In the light of this feedback the Board decided to remove the requirement to provide a disaggregation across a minimum of three credit risk rating grades, and instead require that the disaggregation to be aligned with how credit risk is managed internally. The Board additionally decided to permit the use of an ageing analysis for financial assets for which delinquency information is the only borrower-specific information available to assess significant increases in credit risk.


Simplified approach for trade receivables, contract assets and lease receivables BC48GGThis IFRS includes exceptions to the general disclosures for trade receivables,

contract assets and lease receivables when an entity applies the simplified approach. The Board noted that these exemptions provide relief that is consistent with the intention to simplify the application of the impairment model for these categories of financial assets to alleviate some of the practical concerns of tracking changes in credit risk.

Maximum exposure to credit risk (paragraphs 36(a), B9 and B10)

BC49 Paragraph 36(a) requires disclosure of an entity’s maximum exposure to credit risk at the reporting date. Some respondents to ED 7 stated that these disclosures would not provide useful information when there are no identified problems in a loan portfolio, and it is not likely that collateral would be called on. However, the Board disagreed because it believes that such information:

(a) provides users of financial statements with a consistent measure of an entity’s

exposure to credit risk; and (b) takes into account the possibility that the maximum exposure to loss may

differ from the amount recognised in the balance sheet. BC49A In Improvements to IFRSs issued in May 2010, the Board enhanced consistency

within IFRS 7 by clarifying that the disclosure requirement in paragraph 36(a) applies only to financial assets whose carrying amounts do not show the reporting entity’s maximum exposure to credit risk. Such an approach is consistent with the approach taken in paragraph 29(a), which states that disclosure of fair value is not required when the carrying amount is a reasonable approximation of fair value. Moreover, the Board concluded that the requirement might be duplicative for assets that are presented in the statement of financial position because the carrying amount of these assets often represents the maximum exposure to credit risk. In the Board’s view, the disclosure requirement should focus on the entity’s exposure to credit risk that is not already reflected in the statement of financial position.

BC50 Some respondents to ED 7 questioned whether the maximum exposure to credit risk

for a derivative contract is its carrying amount because fair value does not always reflect potential future exposure to credit risk (see paragraph B10(b)). However, the Board noted that paragraph 36(a) requires disclosure of the amount that best represents the maximum exposure to credit risk at the reporting date, which is the carrying amount.

Collateral held as security and other credit enhancements (paragraphs 36(b) and 37(c))

BC51 ED 7 proposed that, unless impracticable, the entity should disclose the fair value of

collateral held as security and other credit enhancements, to provide information about the loss the entity might incur in the event of default. However, many respondents to ED 7 disagreed with this proposal on cost/benefit grounds. Respondents indicated that fair value information might not be available for:

(a) small entities and entities other than banks, which may find it onerous to

acquire information about collateral; (b) banks that collect precise information on the value of collateral only on

origination, for loans whose payments are made on time and in full (for example a mortgage portfolio secured by properties, for which valuations are not kept up to date on an asset-by-asset basis);


(c) particular types of collateral, such as a floating charge on all the assets of an entity; and

(d) insurers that hold collateral for which fair value information is not readily

available. BC52 The Board also noted respondents’ concerns that an aggregate disclosure of the fair

value of collateral held would be misleading when some loans in a portfolio are over-collateralised, and other loans have insufficient collateral. In these circumstances, netting the fair value of the two types of collateral would under-report the amount of credit risk. The Board agreed with respondents that the information useful to users is not the total amount of credit exposure less the total amount of collateral, but rather is the amount of credit exposure that is left after available collateral is taken into account.

BC53 Therefore, the Board decided not to require disclosure of the fair value of collateral

held, but to require disclosure of only a description of collateral held as security and other credit enhancements. The Board noted that such disclosure does not require an entity to establish fair values for all its collateral (in particular when the entity has determined that the fair value of some collateral exceeds the carrying amount of the loan) and, thus, would be less onerous for entities to provide than fair values.

Credit quality of financial assets that are neither past due nor impaired

(paragraph 36(c))19

BC54 The Board noted that information about credit quality gives a greater insight into the credit risk of assets and helps users assess whether such assets are more or less likely to become impaired in the future. Because this information will vary between entities, the Board decided not to specify a particular method for giving this information, but rather to allow each entity to devise a method that is appropriate to its circumstances.

Financial assets with renegotiated terms (paragraph 36(d))

BC54A In Improvements to IFRSs issued in May 2010, the Board addressed a practical

concern relating to the disclosure requirements for renegotiated financial assets. The Board deleted the requirement in paragraph 36(d) to disclose the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated. The Board considered the difficulty in identifying financial assets whose terms have been renegotiated to avoid becoming past due or impaired (rather than for other commercial reasons). The Board noted that the original requirement was unclear about whether the requirement applies only to financial assets that were renegotiated in the current reporting period or whether past negotiations of those assets should be considered. Moreover, the Board was informed that commercial terms of loans are often renegotiated regularly for reasons that are not related to impairment. In practice it is difficult, especially for a large portfolio of loans, to ascertain which loans were renegotiated to avoid becoming past due or impaired.

Financial assets that are either past due or impaired (paragraph 37)

20

BC55 The Board decided to require separate disclosure of financial assets that are past due or impaired to provide users with information about financial assets with the greatest credit risk (paragraph 37). This includes: (a) an analysis of the age of financial assets, including trade receivables, that are

past due at the reporting date, but not impaired (paragraph 37(a)). This information provides users with information about those financial assets that are more likely to become impaired and helps users to estimate the level of future impairment losses.

19

IFRS 9 Financial Instruments deleted paragraph 36(c) of IFRS 7. 20

IFRS 9 Financial Instruments deleted paragraph 37 of IFRS 7.


(b) an analysis of financial assets that are individually determined to be impaired

at the reporting date, including the factors the entity considered in determining that the financial assets are impaired (paragraph 37(b)). The Board concluded that an analysis of impaired financial assets by factors other than age (eg nature of the counterparty, or geographical analysis of impaired assets) would be useful because it helps users to understand why the impairment occurred.

BC55A In Improvements to IFRSs issued in May 2010, the Board addressed a concern that

the disclosure of the fair value of collateral was potentially misleading. Within a class of assets some might be over-collateralised while others might be under-collateralised. Hence, aggregate disclosure of the fair value might be misleading. Therefore, the Board removed from paragraph 37(c) the requirement to disclose the fair value of collateral and other credit enhancements. However, the Board believes that information on the financial effect of such assets is useful to users. Hence, the Board included in paragraph 36(b) a requirement to disclose a description of collateral held as security and of other credit enhancements and to disclose their financial effect.

Collateral and other credit enhancements obtained (paragraph 38)

BC56 Paragraph 38 requires the entity to disclose the nature and carrying amount of assets obtained by taking possession of collateral held as security or calling on other credit enhancements and its policy for disposing of such assets. The Board concluded that this information is useful because it provides information about the frequency of such activities and the entity’s ability to obtain and realise the value of the collateral. ED 7 had proposed that the entity should disclose the fair value of the assets obtained less the cost of selling them, rather than the carrying amount. The Board noted that this amount might be more relevant in the case of collateral obtained that is expected to be sold. However, it also noted that such an amount would be included in the impairment calculation that is reflected in the amount recognised in the balance sheet and the purpose of the disclosure is to indicate the amount recognised in the balance sheet for such assets.

BC56A In Improvements to IFRSs issued in May 2010, the Board enhanced consistency within IFRS 7 by clarifying that paragraph 38 requires entities to disclose the amount of foreclosed collateral held at the reporting date. This is consistent with the objective in IFRS 7 to disclose information that enables users to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the end of the reporting period.

Liquidity risk (paragraphs 34(a), 39, B10A and B11A-B11F)

BC57 The Board decided to require disclosure of a maturity analysis for financial liabilities showing the remaining earliest contractual maturities (paragraph 39(a) and paragraphs B11-B16 of Appendix B

21). Liquidity risk, ie the risk that the entity will

encounter difficulty in meeting commitments associated with financial liabilities, arises because of the possibility (which may often be remote) that the entity could be required to pay its liabilities earlier than expected. The Board decided to require disclosure based on the earliest contractual maturity date because this disclosure shows a worst case scenario.

BC58 Some respondents expressed concerns that such a contractual maturity analysis does not reveal the expected maturity of liabilities, which, for some entities―eg banks with many demand deposits―may be very different. They suggested that a contractual maturity analysis alone does not provide information about the conditions expected in normal circumstances or how the entity manages deviations from expected maturity. Therefore, the Board decided to require a description of how the entity manages the liquidity risk portrayed by the contractual maturity analysis.

21

Amendments to IFRS 7 issued in March 2009 amended paragraph 39 and paragraphs B11-B16. The paragraph references in paragraph BC57 have not been amended as a result of these amendments.


BC58A In March 2009 the Board amended the disclosure requirements on the nature and extent of liquidity risk by:

(a) amending the definition of liquidity risk to clarify that paragraph 39 applies only to financial liabilities that will result in the outflow of cash or another financial asset. This clarifies that the disclosure requirements would not apply to financial liabilities that will be settled in the entity’s own equity instruments and to liabilities within the scope of IFRS 7 that are settled with non-financial assets.

(b) emphasising that an entity must provide summary quantitative data about its exposure to liquidity risk based on information provided internally to key management personnel of the entity as required by paragraph 34(a). This reinforces the principles of IFRS 7.

(c) amending the requirement in paragraph 39 to disclose a contractual maturity analysis.

BC58B The requirements in paragraph 39(a) and (b) relate to minimum benchmark disclosures as set out in paragraph 34(b) and are expected to be relatively easy to apply. However, the Board noted that the requirement to provide disclosures based on the remaining contractual maturities was difficult to apply for some derivative financial liabilities and did not always result in information that reflects how many entities manage liquidity risk for such instruments. Hence, for some circumstances the Board eliminated the previous requirement to disclose contractual maturity information for derivative financial liabilities. However, the Board retained minimum contractual maturity disclosures for non-derivative financial liabilities (including issued financial guarantee contracts within the scope of the IFRS) and for some derivative financial liabilities.

BC58C The Board noted that for non-derivative financial liabilities (including issued financial guarantee contracts within the scope of the IFRS) and some derivative financial liabilities, contractual maturities are essential for an understanding of the timing of cash flows associated with the liabilities. Therefore, this information is useful to users of financial statements. The Board concluded that disclosures based on the remaining contractual maturities of these financial liabilities should continue to be required.

BC58D The Board also emphasised the existing requirement to disclose a maturity analysis for financial assets held for managing liquidity risk, if that information is required to enable users of its financial statements to evaluate the nature and extent of liquidity risk. The Board also emphasised that an entity must explain the relationship between qualitative and quantitative disclosures about liquidity risk so that users of financial statements can evaluate the nature and extent of liquidity risk.

Market risk (paragraphs 40-42 and B17-B28)

BC59 The Board decided to require disclosure of a sensitivity analysis for each type of market risk (paragraph 40) because:

(a) users have consistently emphasised the fundamental importance of sensitivity

analysis; (b) a sensitivity analysis can be disclosed for all types of market risk and by all

entities, and is relatively easy to understand and calculate; and (c) it is suitable for all entities―including non-financial entities―that have

financial instruments. It is supported by disclosures of how the entity manages the risk. Thus, it is a simpler and more suitable disclosure than other approaches, including the disclosures of terms and conditions and the gap analysis of interest rate risk previously required by IAS 32.


The Board noted that information provided by a simple sensitivity analysis would not be comparable across entities. This is because the methodologies used to prepare the sensitivity analysis and the resulting disclosures would vary according to the nature of the entity and the complexity of its risk management systems.

BC60 The Board acknowledged that a simple sensitivity analysis that shows a change in only one variable has limitations. For example, the analysis may not reveal non-linearities in sensitivities or the effects of interdependencies between variables. The Board decided to meet the first concern by requiring additional disclosure when the sensitivity analysis is unrepresentative of a risk inherent in a financial instrument (paragraph 42). The Board noted that it could meet the second concern by requiring a more complex sensitivity analysis that takes into account the interdependencies between risks. Although more informative, such an analysis is also more complex and costly to prepare. Accordingly, the Board decided not to require such an analysis, but to permit its disclosure as an alternative to the minimum requirement when it is used by management to manage risk.

BC61 Respondents to ED 7 noted that a value-at-risk amount would not show the effect on

profit or loss or equity. However, entities that manage on the basis of value at risk would not want to prepare a separate sensitivity analysis solely for the purpose of this disclosure. The Board’s objective was to require disclosures about sensitivity, not to mandate a particular form of sensitivity disclosure. Therefore, the Board decided not to require disclosure of the effects on profit or loss and equity if an alternative disclosure of sensitivity is made.

BC62 Respondents to ED 7 requested the Board to provide more guidance and clarification

about the sensitivity analysis, in particular:

(a) what is a reasonably possible change in the relevant risk variable? (b) what is the appropriate level of aggregation in the disclosures? (c) what methodology should be used in preparing the sensitivity analysis?

BC63 The Board concluded that it would not be possible to provide comprehensive guidance

on the methodology to be used in preparing the sensitivity analysis. The Board noted that more comparable information would be obtained if it imposed specific requirements about the inputs, process and methodology of the analysis, for example disclosure of the effects of a parallel shift of the yield curve by 100 basis points. However, the Board decided against such a specific requirement because a reasonably possible change in a relevant risk variable (such as interest rates) in one economic environment may not be reasonably possible in another (such as an economy with higher inflation). Moreover, the effect of a reasonably possible change will vary depending on the entity’s risk exposures. As a result, entities are required to judge what those reasonably possible changes are.

BC64 However, the Board decided that it would provide high level application guidance

about how the entity should assess what is a reasonably possible change and on the appropriate level of aggregation in the disclosures. In response to comments received on ED 7, the Board also decided to clarify that: (a) an entity should not aggregate information about material exposures to risk

from significantly different economic environments. However, if it has exposure to only one type of market risk in only one economic environment, it might not show disaggregated information.

(b) the sensitivity analysis does not require entities to determine what the profit or

loss for the period would have been had the relevant risk variable been different. The sensitivity analysis shows the effect on current period profit or loss and equity if a reasonably possible change in the relevant risk variable


had been applied to the risk exposures in existence at the balance sheet date. (c) a reasonably possible change is judged relative to the economic

environments in which the entity operates, and does not include remote or “worst case” scenarios or “stress tests”.

(d) entities are required to disclose only the effects of the changes at the limits of

the reasonably possible range of the relevant risk variable, rather than all reasonably possible changes.

(e) the time frame for which entities should make an assessment about what is

reasonably possible is the period until the entity next presents these disclosures, usually its next annual reporting period.

The Board also decided to add a simple example of what a sensitivity analysis might look like.

Operational risk

BC65 The Board discussed whether it should require disclosure of information about operational risk. However, the Board noted that the definition and measurement of operational risk are in their infancy and are not necessarily related to financial instruments. It also decided that such disclosures would be more appropriately located outside the financial statements. Therefore, the Board decided to defer this issue to its research project on management commentary.

Disclosures relating to transfers of financial assets

Background

BC65A In March 2009, in conjunction with the Memorandum of Understanding between the

IASB and the US Financial Accounting Standards Board (FASB) to improve and achieve convergence of IFRS and US standards for derecognition, the IASB published an exposure draft to replace the derecognition requirements of IAS 39

22 and to

improve the disclosure requirements in IFRS 7 relating to the transfer of financial assets and liabilities. In response to feedback received on the exposure draft the IASB developed more fully the alternative model described in the exposure draft and the boards discussed the alternative model.

BC65B In May 2010 the boards reconsidered their strategies and plans for the derecognition

project in the light of:

(a) their joint discussions of the alternative derecognition model described in the exposure draft;

(b) the June 2009 amendments to the US GAAP derecognition guidance by the

FASB, which reduced the differences between IFRSs and US GAAP by improving requirements relating to derecognition of financial assets and liabilities; and

(c) the feedback the IASB received from national standard-setters on the largely

favourable effects of the IFRS derecognition requirements during the financial crisis.

BC65C As a result, in June 2010 the IASB and the FASB agreed that their near-term priority

was on increasing the transparency and comparability of their standards by improving and aligning the disclosure requirements in IFRSs and US GAAP for financial assets

22

IFRS 9 Financial Instruments replaced IAS 39. IFRS 9 applies to all items that were previously within the scope of IAS 39.


transferred to another entity. The boards also decided to conduct additional research and analysis, including a post-implementation review of some of the FASB’s recently amended requirements, as a basis for assessing the nature and direction of any further efforts to improve or align IFRSs and US GAAP.

BC65D As a result, the Board decided to finalise the derecognition disclosures and related

objectives, proposed in the exposure draft. Accordingly, in October 2010 the Board issued Disclosures—Transfers of Financial Assets (Amendments to IFRS 7), requiring disclosures to help users of financial statements: (a) to understand the relationship between transferred financial assets that are

not derecognised in their entirety and the associated liabilities; and (b) to evaluate the nature of and risks associated with the entity’s continuing

involvement in derecognised financial assets.


BC65E When financial assets are transferred but not derecognised, there has been an exchange transaction that is not reflected as such in the financial statements as a result of the accounting requirements. The Board concluded that in those situations, users of financial statements need to understand the relationship between those transferred financial assets and the associated liabilities that an entity recognises. Understanding that relationship helps users of financial statements in assessing an entity’s cash flow needs and the cash flows available to the entity from its assets.

BC65F The Board observed that IFRS 7 required disclosures about transferred financial

assets that are not derecognised in their entirety. The Board decided to continue requiring those disclosures because they provide information that is useful in understanding the relationship between transferred financial assets that are not derecognised and associated liabilities.

BC65G However, the Board also decided that the following additional disclosures were

necessary:

(a) a qualitative description of the nature of the relationship between transferred assets and associated liabilities, including restrictions arising from the transfer on the reporting entity’s use of the transferred assets; and

(b) a schedule that sets out the fair value of the transferred financial assets, the

associated liabilities and the net position when the counterparty to the associated liabilities has recourse only to the transferred assets.

BC65H The Board concluded that these disclosures would provide information that is useful in

assessing the extent to which the economic benefits generated by assets of an entity cannot be used in an unrestricted manner, as is implied when assets are recognised in an entity’s statement of financial position. In addition, the disclosures would provide information about liabilities that will be settled entirely from the proceeds received from the transferred assets, and thus identify liabilities for which the counterparties do not have claims on the assets of the entity in general. For those assets for which the underlying cash flows are committed to be used to satisfy related liabilities, the Board noted that a schedule that sets out the fair value of the transferred financial assets, the associated liabilities and the net position (in addition to showing the cash flow relationship between those assets and liabilities) also provides a means of understanding the net exposure of an entity following a transfer transaction that fails derecognition.


Transferred financial assets that are derecognised in their entirety BC65I The Board was asked by users of financial statements, regulators and others to review

the disclosure requirements for what are often described as ‘off balance sheet’ activities. Transfers of financial assets, particularly securitisation of financial assets, were identified as forming part of such activities.

BC65J The Board concluded that when an entity retains continuing involvement in financial

assets that it has derecognised, users of financial statements would benefit from information about the risks to which the entity remains exposed. Such information is relevant in assessing the amount, timing and uncertainty of the entity’s future cash flows.

BC65K The Board observed that IFRS 7 already requires certain disclosures by class of

financial instrument or by type of risk. However, the IFRS requires the information at an aggregated level, so information specific to derecognition transactions is often not available. In response to requests from users and others the Board concluded that disclosures specific to derecognition transactions were necessary.

BC65L The Board concluded that the disclosures should focus on the risk exposure of an

entity, and should provide information about the timing of the return and the cash outflow that would or may be required to repurchase the derecognised financial assets in the future. The Board reasoned that a combination of disclosures about the strike price or repurchase price to repurchase assets, the fair value of its continuing involvement, the maximum exposure to loss and qualitative information about an entity’s obligations to provide financial support are relevant in understanding an entity’s exposure to risks.

BC65M In addition, the Board concluded that information about an entity’s gain or loss on

derecognition and the timing of recognition of that gain or loss provides information about the proportion of an entity’s profit or loss that arises from transferring financial assets in which the entity also retains continuing involvement. Such information is useful in assessing the extent to which an entity generates profits from transferring financial assets while retaining some form of continuing involvement and thus exposure to risk.

BC65N The Board observed that the total amount of proceeds from transfer activity (that

qualifies for derecognition) in a reporting period may not be evenly distributed throughout the reporting period (eg if a substantial proportion of the total amount of transfer activity takes place in the closing days of a reporting period). The Board decided that if transfer activity is concentrated around the end of reporting periods, disclosure of this fact provides an indication of whether transfer transactions are undertaken for the purpose of altering the appearance of the statement of financial position rather than for an ongoing commercial or financing purpose. In such cases, the amendments require disclosure of when the greatest transfer activity took place within that reporting period, the amount recognised from the transfer activity in that part of the reporting period, and the total amount of proceeds from transfer activity in that part of the reporting period.

Application of the disclosure requirements to a servicing contract

BC65O Paragraphs 42A–42H of IFRS 7 require an entity to provide disclosures for all transferred financial assets that are not derecognised in their entirety and for any continuing involvement in a transferred asset that is derecognised in its entirety, existing at the reporting date, irrespective of when the related transfer transaction occurred.

BC65P The Board received a request to clarify whether servicing contracts constitute continuing involvement for the purposes of applying the disclosure requirements in


paragraphs 42E–42H of IFRS 7. The question raised was whether paragraph 42C(c) of IFRS 7 excludes servicing contracts from the scope of those disclosure requirements.

BC65Q The Board observed that paragraph 42C(c) of IFRS 7 discusses arrangements whereby an entity retains the contractual rights to receive the cash flows of a financial asset but assumes a contractual obligation to pay the cash flows to one or more entities and the conditions in paragraph 3.2.5(a)–(c) of IFRS 9 are met; ie it is a ‘pass-through arrangement’.

23 Paragraph 42C(c) of IFRS 7 confirms that the cash

flows collected to be passed through are not themselves continuing involvement for the purposes of the transfer disclosure requirements. Consequently, the Board observed that the servicer’s obligation to pass through to one or more entities the cash flows that it collects from a transferred financial asset is not in itself continuing involvement for the purposes of the disclosure requirements, because the activity of passing through cash flows does not in itself constitute an interest in the future performance of the transferred financial asset. The Board observed, however, that a servicing contract is generally continuing involvement for the purposes of the transfer disclosure requirements because, in most cases, the servicer has an interest in the future performance of the transferred financial assets as a result of that contract. That would be the case if the amount and/or timing of the servicing fee depended on the amount and/or timing of the cash flows collected from the transferred financial asset. This would be true irrespective of how the servicer receives its servicing fee; ie whether the servicer retains a portion of the cash flows collected from the transferred financial asset as its fee or it passes through all of the cash flows collected and receives its fee separately from the transferee or another entity.

BC65R On the basis of these observations, the Board noted that paragraphs 42C and B30 of IFRS 7 are considered to determine whether a servicing contract gives rise to continuing involvement for the purposes of the transfer disclosure requirements. The Board decided to add guidance to the Application Guidance of IFRS 7 to clarify how the guidance in paragraph 42C of IFRS 7 is applied to servicing contracts.

BC65S During its discussions on this issue, the Board noted that for the purpose of applying the disclosure requirements in paragraphs 42E–42H of IFRS 7, continuing involvement as described in paragraph 42C of IFRS 7 has a different meaning from that used in paragraphs 3.2.6(c)(ii) and 3.2.16 of IFRS 9.

24 The Board considered,

but decided against, making a clarification in respect of this point because it thought that this difference was already clear from the description of continuing involvement in the two IFRSs.

Effective date and transition (paragraphs 43 and 44)

BC66 The Board is committed to maintaining a “stable platform” of substantially unchanged

Standards for annual periods beginning on or before 1 January 2005, when many entities will adopt IFRSs for the first time. In addition, some preparers will need time to make the system changes necessary to comply with the IFRS. Therefore, the Board decided that the effective date of IFRS 7 should be annual periods beginning on or after 1 January 2007, with earlier application encouraged.

BC67 The Board noted that entities that apply IFRS 7 only when it becomes mandatory will

have sufficient time to prepare comparative information. This conclusion does not apply to entities that apply IFRS 7 early. In particular, the time would be extremely short for those entities that would like to apply IFRS 7 when they first adopt IFRSs in 2005, to avoid changing from local GAAP to IAS 32 and IAS 30 when they adopt IFRSs and then changing again to IFRS 7 only one or two years later. Therefore, the Board gave an exemption from providing comparative disclosure in the first year of application of IFRS 7 to any entity that both (a) is a first-time adopter of IFRSs and (b)

23

If IFRS 9 has not been applied early, the equivalent reference is paragraph 19(a)–(c) of IAS 39. 24

If IFRS 9 has not been applied early, the equivalent references are paragraphs 20(c)(ii) and 30 of IAS 39.


applies IFRS 7 before 1 January 2006. The Board noted that such an exemption for first-time adopters exists in IAS 32 and IFRS 4 and that the reasons for providing the exemption apply equally to IFRS 7.

BC68 The Board also considered whether it should provide an exemption from presenting all

or some of the comparative information to encourage early adoption of IFRS 7 by entities that already apply IFRSs.

BC69 The Board noted that IFRS 7 contains two types of disclosures: accounting

disclosures (in paragraphs 7-30) that are based on requirements previously in IAS 32 and new risk disclosures (in paragraphs 31-42). The Board concluded that existing users of IFRSs already will have complied with the requirements of IAS 32 and will not encounter difficulty in providing comparative information for the accounting disclosures.

BC70 The Board noted that most of the risk disclosures, in particular those about market risk,

are based on information collected at the end of the reporting period. The Board concluded that although IFRS 7 was published in August 2005, it will still be possible for entities to collect the information that they require to comply with IFRS 7 for accounting periods beginning in 2005. However, it would not always be possible to collect the information needed to provide comparative information about accounting periods that began in 2004. As a result, the Board decided that entities that apply IFRS 7 for accounting periods beginning in 2005 (ie before 1 January 2006) need not present comparative information about the risk disclosures.

BC71 The Board also noted that comparative disclosures about risk are less relevant

because these disclosures are intended to have predictive value. As a result information about risk loses relevance more quickly than other types of disclosure, and any disclosures required by previous GAAP are unlikely to be comparable with those required by IFRS 7. Accordingly, the Board decided that an entity that is not a first-time adopter and applies IFRS 7 for annual periods beginning before 1 January 2006 need not present comparative disclosures about the nature and extent of risks arising from financial instruments. In reaching this conclusion, the Board noted that the advantages of encouraging more entities to apply IFRS 7 early outweighed the disadvantage of the reduced information provided.

BC72 The Board considered and rejected arguments that it should extend the exemption:

(a) from providing comparative information to first-time adopters that applied IFRS 7 before 1 January 2007 (rather than only those that applied IFRS 7 before 1 January 2006). The Board concluded that an entity that intends to adopt IFRSs for the first time on or after 1 January 2006 will have sufficient time to collect information for its accounting period beginning on or after 1 January 2005 and, thus, should not have difficulty in providing the comparative disclosures for accounting periods beginning on or after 1 January 2006.

(b) from providing comparative disclosures about the significance of financial

instruments to all entities adopting the IFRS for annual periods beginning before 1 January 2006 (rather than only to first-time adopters). The Board concluded that only first-time adopters warranted special relief so that they would be able to adopt IFRS 7 early without first having to adopt IAS 32 and IAS 30 for only one period. Entities that are not first-time adopters already apply IAS 32 and IAS 30 and have no particular need to adopt IFRS 7 before 1 January 2007.

(c) from providing comparative disclosures about risk to periods beginning before

1 January 2007 (rather than 2006). The Board noted that entities adopting IFRS 7 after 1 January 2006 would have a full calendar year to prepare after the publication of the IFRS.


BC72A Annual Improvements to IFRSs 2012–2014 Cycle, issued in September 2014, amended paragraph B30 and added paragraph B30A of IFRS 7. The Board considered whether the amendment should apply to any period presented that begins before the annual period for which the entity first applies the amendment. The Board noted that paragraph 42E(b) of IFRS 7 requires disclosure of the fair value of the assets and liabilities that represent the entity’s continuing involvement in the derecognised financial assets. Application of the amendment to such a period might therefore require an entity to determine the fair value as at the end of the period for a servicing asset or servicing liability, which the entity might not have previously determined. It might be impracticable for an entity to determine the fair value of such a servicing asset or servicing liability without using hindsight. The Board also noted that paragraph 44M of IFRS 7 provides transition relief by which the entity need not apply the transfer disclosure requirements to comparative periods. Consequently, to avoid the risk of hindsight being applied, the Board decided to require the application of the amendment only to annual periods beginning on or after the beginning of the annual period for which the amendment is applied for the first time. Furthermore, for the same reason, the Board observed that those transition provisions should be available to first-time adopters. The Board has characterised the transition provisions in paragraph 44AA of IFRS 7 as retrospective despite this relief, because entities are required to look back to past derecognition events to determine whether a servicing asset or servicing liability needs to be disclosed.

25

Applicability of the offsetting amendments to IFRS 7 to condensed interim financial statements

BC72B The Board was asked to clarify the applicability of the amendments to IFRS 7 Disclosure–Offsetting Financial Assets and Financial Liabilities (the ‘amendments to IFRS 7 concerning offsetting’), issued in December 2011, to condensed interim financial statements. It was asked to clarify the meaning of the reference to ‘interim periods within those annual periods’, used in paragraph 44R of IFRS 7. There was uncertainty about whether the disclosures required by paragraphs 13A–13F and B40–B53 of IFRS 7 were required to be included in condensed interim financial statements prepared in accordance with IFRS and, if so, whether those disclosures should be presented in every set of condensed interim financial statements, or only in those interim financial statements presented in the first year in which the disclosure requirements are effective or for which disclosure would be required under the principles in IAS 34 Interim Financial Reporting.

BC72C The Board noted that IAS 34 was not consequentially amended upon issue of the amendments to IFRS 7 concerning offsetting and that when the Board intends to require an entity to provide a disclosure in condensed interim financial statements in all circumstances it amends IAS 34. Consequently, the Board decided to amend paragraph 44R of IFRS 7 within the Annual Improvements to IFRSs 2012–2014 Cycle in order to clarify that the additional disclosure required by the amendments to IFRS 7 concerning offsetting is not specifically required for all interim periods. However, when considering this amendment, the Board noted that the additional disclosure is required to be given in condensed interim financial statements prepared in accordance with IAS 34 when its inclusion would be required in accordance with the general requirements of that IFRS. IAS 34 requires the disclosure of information in condensed interim financial statements when its omission would make the condensed interim financial statements misleading. The Board noted that in accordance with paragraph 15 of IAS 34 “an entity shall include in its interim financial report an explanation of events and transactions that are significant to an understanding of the changes in financial position and performance of the entity since the end of the last annual reporting period”. The Board further noted that in accordance with paragraph 25 of IAS 34: “The overriding goal is to ensure that an interim financial report includes all information that is relevant to understanding an entity's financial position and performance during the interim period”.

25 Annual Improvement to IFRS Standards 2014-2016 Cycle, issued in December 2016, amended IFRS 1 First-time

Adoption of International Financial Reporting Standards by deleting the short-term exemption for first-time adopters (see paragraph BC99 of IFRS 1), because it was no longer applicable.


Summary of main changes from the exposure draft

BC73 The main changes to the proposals in ED 7 are:

(a) ED 7 proposed disclosure of the amount of change in the fair value of a financial liability designated as at fair value through profit or loss that is not attributable to changes in a benchmark interest rate as a proxy for the amount of change in fair value attributable to changes in the instrument’s credit risk. The IFRS permits entities to determine the amount of change in fair value attributable to changes in the instrument’s credit risk using an alternative method if the entity believes that its alternative method gives more faithful representation. The proxy disclosure has been amended to be the amount of change in fair value that is not attributable to changes in market conditions that give rise to market risk. As a result, entities may exclude factors other than a change in a benchmark interest rate when calculating the proxy.

(b) a requirement has been added for disclosures about the difference between

the transaction price at initial recognition (used as fair value in accordance with paragraph AG76 of IAS 39B5.4.8

26 of IFRS 9) and the results of a

valuation technique that will be used for subsequent measurement. (c) no disclosure is required of the fair value of collateral pledged as security and

other credit enhancements as was proposed in ED 7. (d) the sensitivity analysis requirements have been clarified. (e) the exemption from presenting comparatives has been widened. (f) the capital disclosures are a stand-alone amendment to IAS 1, rather than

part of the IFRS. No disclosure is required of whether the entity has complied with capital targets set by management and of the consequences of any non-compliance with those targets.

(g) the amendments to IFRS 4 related to IFRS 7 have been modified to reduce

systems changes for insurers.

26

IFRS 13, issued in May 2011, contains the requirements for measuring fair value. As a consequence of issuing that IFRS, paragraph B5.4.8 of IFRS 9 was deleted. However, in 2014 the requirements for amortised cost measurement and impairment were added to IFRS 9 as Sections 5.4 and 5.5. Paragraph B5.4.8 of IFRS 9 now contains requirements related to amortised cost measurement.


APPENDIX A Amendments to Basis for Conclusions on other IFRSs

This appendix contains amendments to the Basis for Conclusions on other IFRSs that are necessary in order to ensure consistency with IFRS 7. In the amended paragraphs, new text is underlined and deleted text is struck through.

* * *

The amendments contained in this appendix when this Basis for Conclusions was issued have been incorporated into the relevant Basis for Conclusions.


Disclosures

Guidance on Implementing Hong Kong Financial Reporting Standard 7

HKFRS 7 IG Revised May 2014September 2018


© Copyright 2 HKFRS 7 IG (September 2018)

CONTENTS

from paragraph

GUIDANCE ON IMPLEMENTING IFRS 7 FINANCIAL INSTRUMENTS: DISCLOSURES

INTRODUCTION IG1

CLASSES OF FINANCIAL INSTRUMENTS AND LEVEL OF DISCLOSURE

IG5

SIGNIFICANCE OF FINANCIAL INSTRUMENTS FOR FINANCIAL POSITION AND PERFORMANCE

IG712

Financial liabilities at fair value through profit or loss IG7

Defaults and breaches IG12

Total interest expense IG13

Hedge accounting IG13C

Fair value IG14

NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS

IG15

Qualitative disclosures IG15

Quantitative disclosures IG18

Credit risk IG2120A

Collateral and other credit enhancements pledged IG22

Credit quality IG23

Financial assets that are either past due or impaired IG26

Market risk IG32

Other market risk disclosures IG37

Credit risk IG20A

DERECOGNITION IG40A

DISCLOSURES IG40D

TRANSITION FROM IAS 39 TO IFRS 9 IG40E

TRANSITION IG41

APPENDIX

A Amendments to guidance on other IFRSs



Guidance on Implementing IFRS 7 Financial Instruments: Disclosures

This guidance accompanies, but is not part of, IFRS 7.

Introduction IG1 This guidance suggests possible ways to apply some of the disclosure requirements in

IFRS 7. The guidance does not create additional requirements. IG2 For convenience, each disclosure requirement in the IFRS is discussed separately. In

practice, disclosures would normally be presented as an integrated package and individual disclosures might satisfy more than one requirement. For example, information about concentrations of risk might also convey information about exposure to credit or other risk.

IG3-IG4 [Deleted]

Classes of financial instruments and level of disclosure (paragraphs 6 and B1-B3) IG5 Paragraph B3 states that “an entity decides in the light of its circumstances how much

detail it provides to satisfy the requirements of this IFRS, how much emphasis it places on different aspects of the requirements and how it aggregates information to display the overall picture without combining information with different characteristics.” To satisfy the requirements, an entity may not need to disclose all the information suggested in this guidance.

IG6 Paragraph 17(c) of IAS 1 requires an entity to “provide additional disclosures when

compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.”

Significance of financial instruments for financial position and performance (Paragraphs 7-30, B4 and B5)27

Financial liabilities at fair value through profit or loss (paragraphs 10(a)(i) and B4)

IG7- [Deleted]The following example illustrates the calculation that an entity might perform IG11 in accordance with paragraph B4 of Appendix B of the IFRS. IG8 On 1 January 20X1, an entity issues a 10-year bond with a par value of CU150,000

and an annual fixed coupon rate of 8 per cent, which is consistent with market rates for bonds with similar characteristics.

IG9 The entity uses LIBOR as its observable (benchmark) interest rate. At the date of

inception of the bond, LIBOR is 5 per cent. At the end of the first year:

(a) LIBOR has decreased to 4.75 per cent. (b) the fair value for the bond is CU153,811, consistent with an interest rate of 7.6

per cent.*

27

IFRS 9 Financial Instruments deleted paragraph B4 of IFRS 7. In this guidance monetary amounts are denominated in “currency units (CU)”. * This reflects a shift in LIBOR from 5 per cent to 4.75 per cent and a movement of 0.15 per cent which, in the

absence of other relevant changes in market conditions, is assumed to reflect changes in credit risk of the instrument.



IG10 The entity assumes a flat yield curve, all changes in interest rates result from a parallel

shift in the yield curve, and the changes in LIBOR are the only relevant changes in market conditions.

IG11 The entity estimates the amount of change in the fair value of the bond that is not

attributable to changes in market conditions that give rise to market risk as follows:

[paragraph B4(a)] First, the entity computes the liability’s internal rate of return at the start of the period using the observed market price of the liability and the liability’s contractual cash flows at the start of the period. It deducts from this rate of return the observed (benchmark) interest rate at the start of the period, to arrive at an instrument-specific component of the internal rate of return.

At the start of the period of a 10-year bond with a coupon of 8 per cent, the bond’s internal rate of return is 8 per cent. Because the observed (benchmark) interest rate (LIBOR) is 5 per cent, the instrument-specific component of the internal rate of return is 3 per cent.

[paragraph B4(b)] Next, the entity calculates the present value of the cash flows associated with the liability using the liability’s contractual cash flows at the end of the period and a discount rate equal to the sum of (i) the observed (benchmark) interest rate at the end of the period and (ii) the instrument-specific component of the internal rate of return as determined in accordance with paragraph B4(a).

The contractual cash flows of the instrument at the end of the period are:

interest: CU12,000(a)

per year for each of years 2-10.

principal: CU150,000 in year 10. The discount rate to be used to calculate the present value of the bond is thus 7.75 per cent, which is 4.75 per cent end of period LIBOR rate, plus the 3 per cent instrument-specific component. This gives a present value of CU152,367.

(b)

[paragraph B4(c)] The difference between the observed market price of the liability at the end of the period and the amount determined in accordance with paragraph B4(b) is the change in fair value that is not attributable to changes in the observed (benchmark) interest rate. This is the amount to be disclosed

The market price of the liability at the end of the period is CU153,811.

(c)

Thus, the entity discloses CU1,444, which is CU153,811-CU152,367, as the increase in fair value of the bond that is not attributable to changes in market conditions that give rise to market risk.

(a) CU150,000x8% = CU12,000

(b) PV= [CU12,000x(1-(1+0.0775)-9

)/0.0775]+CU150,000x(1+0.0775)-9

(c) market price = [CU12,000x(1-(1+0.076)-9

)/0.076]+CU150,000x(1+0.076)-9



Defaults and breaches (paragraphs 18 and 19)

IG12 Paragraphs 18 and 19 require disclosures when there are any defaults or breaches of loans payable. Any defaults or breaches may affect the classification of the liability as current or non-current in accordance with IAS 1.

Total interest expense (paragraph 20(b))28

IG13 Total interest expense disclosed in accordance with paragraph 20(b) is a component of

finance costs, which paragraph 82(b) of IAS 1 requires to be presented separately in the statement of comprehensive income. The line item for finance costs may also include amounts associated with non-financial liabilities.

Fair value (paragraphs 27-28)

IG13A- [Deleted] IG13B

Hedge accounting (paragraphs 24A–24C)

IG13C Paragraph 24A of IFRS 7 requires that an entity discloses amounts related to items

designated as hedging instruments in a tabular format. The following example illustrates how that information might be disclosed.

Nominal amount of

the hedging

instrument

Carrying amount of the hedging instrument

Line item in the statement

of financial position

where the hedging

instrument is located

Changes in fair value used for

calculating hedge

ineffectiveness for 20X1

Assets Liabilities

Cash flow hedges

Commodity price risk

- Forward sales contracts xx xx xx Line item XX xx

Fair value hedges

Interest rate risk

- Interest rate swaps xx xx xx Line item XX xx

Foreign exchange risk

- Foreign currency loan xx xx xx Line item XX xx

28 In Improvements to IFRSs issued in May 2008, the Board amended paragraph IG13 and removed ‘total interest

income’ as a component of finance costs. This amendment removed an inconsistency with paragraph 32 of IAS 1 Presentation of Financial Statements, which precludes the offsetting of income and expenses (except when required or permitted by an IFRS).



IG13D Paragraph 24B of IFRS 7 requires that an entity discloses amounts related to items designated as hedged items in a tabular format. The following example illustrates how that information might be disclosed.

Carrying amount of the hedged item

Accumulated amount of fair value hedge adjustments on the hedged item

included in the carrying amount of

the hedged item

Line item in the

statement of

financial position in which the hedged item is

included

Change in value used

for calculating

hedge ineffective-

ness for 20X1

Cash flow

hedge reserve

Assets Liabilities Assets Liabilities

Cash flow hedges

Commodity price risk

- Forecast sales - Discontinued hedges (forecast sales)

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

n/a

xx

n/a

xx

xx

Fair value hedges

Interest rate risk

- Loan payable - Discontinued hedges (Loan payable)

–

–

xx

xx

–

–

xx

xx

Line item

XX

Line item XX

xx

n/a

n/a

n/a

Foreign exchange risk

- Firm commitment

xx

xx

xx

xx

Line item XX

xx

n/a



IG13E Paragraph 24C of IFRS 7 requires that an entity discloses amounts that have affected the statement of comprehensive income as a result of applying hedge accounting in a tabular format. The following example illustrates how that information might be disclosed.

Cash flow hedges

(a)

Separate line item

recognised in profit or loss as a

result of a hedge of a

net position

(b)

Change in the value of the

hedging instrument

recognised in other

comprehensive income

Hedge ineffectiveness recognised in profit or loss

Line item in profit or loss (that includes

hedge ineffectiveness)

Amount reclassified

from the cash flow

hedge reserve to profit or

loss

Line item affected in

profit or loss because of the reclassification

Commodity price risk Commodity X - Discontinued hedge

n/a

n/a

xx

n/a

xx

n/a

Line item XX

n/a

xx

xx

Line item XX

Line item XX

(a) The information disclosed in the statement of changes in equity (cash flow hedge reserve) should have the same level of detail as these disclosures.

(b) This disclosure only applies to cash flow hedges of foreign currency risk.

Fair value hedges Ineffectiveness recognised in profit or loss

Line item(s) in profit or loss (that include(s) hedge ineffectiveness)

Interest rate risk xx Line item XX

Foreign exchange risk xx Line item XX

Fair value (paragraph 28) IG14 The fair value aAt initial recognition an entity measures the fair value of financial

instruments that are not traded in active markets. is measured in accordance with IFRS 13 Fair Value Measurement and paragraph AG76 of IAS 39. However, when, after initial recognition, an entity will use a valuation technique that incorporates data not obtained from observable markets, there may be a difference between the transaction price at initial recognition and the amount determined at initial recognition using that valuation technique. In these circumstances, the difference will be recognised in profit or loss in subsequent periods in accordance with IAS 39 IFRS 9 Financial Instruments and the entity’s accounting policy. Such recognition reflects changes in factors (including time) that market participants would take into account when pricing the asset or liability (see paragraph AG76(b) of IAS 39 B5.1.2A(b) of IFRS 9). Paragraph 28 requires disclosures in these circumstances. An entity might disclose the following to comply with paragraph 28:



Background On 1 January 20X1 an entity purchases for CU15 million financial assets that are not traded in an active market. The entity has only one class of such financial assets. The transaction price of CU15 million is the fair value at initial recognition. After initial recognition, the entity will apply a valuation technique to measure the financial assets’ fair value. This valuation technique use inputs other than data from observable markets. At initial recognition, the same valuation technique would have resulted in an amount of CU14 million, which differs from fair value by CU1 million. The entity has existing differences of CU5 million at 1 January 20X1. Application of requirements The entity’s 20X2 disclosure would include the following: Accounting policies The entity uses the following valuation technique to measure the fair value of financial instruments that are not traded in an active market: [description of technique, not included in this example]. Differences may arise between the fair value at initial recognition (which, in accordance with IFRS 13 and IAS 39 IFRS 9, is normally the transaction price) and the amount determined at initial recognition using the valuation technique. Any such differences are [description of the entity’s accounting policy].

In the notes to the financial statements As discussed in note X, the entity uses [name of valuation technique] to measure the fair value of the following financial instruments that are not traded in an active market. However, in accordance with IFRS 13 and IAS 39 IFRS 9, the fair value of an instrument at inception is normally the transaction price. If the transaction price differs from the amount determined at inception using the valuation technique, that difference is [description of the entity’s accounting policy]. The differences yet to be recognised in profit or loss are as follows: 31 Dec X2 31 Dec X1 CU million CU million Balance at beginning of year 5.3 5.0 New transactions - 1.0 Amounts recognised in profit or loss during the year (0.7) (0.8) Other increases - 0.2 Other decreases (0.1) (0.1) Balance at end of year 4.5 5.3



Nature and extent of risks arising from financial instruments (paragraphs 31-42 and B6-B28)

Qualitative disclosures (paragraph 33)

IG15 The type of qualitative information an entity might disclose to meet the requirements in

paragraph 33 includes, but is not limited to, a narrative description of:

(a) the entity’s exposures to risk and how they arose. Information about risk exposures might describe exposures both gross and net of risk transfer and other risk-mitigating transactions.

(b) the entity’s policies and processes for accepting, measuring, monitoring and

controlling risk, which might include:

(i) the structure and organisation of the entity’s risk management function(s), including a discussion of independence and accountability;

(ii) the scope and nature of the entity’s risk reporting or measurement

systems; (iii) the entity’s policies for hedging or mitigating risk, including its policies

and procedures for taking collateral; and (iv) the entity’s processes for monitoring the continuing effectiveness of

such hedges or mitigating devices.

(c) the entity’s policies and procedures for avoiding excessive concentrations of risk.

IG16 Information about the nature and extent of risks arising from financial instruments is

more useful if it highlights any relationship between financial instruments that can affect the amount, timing or uncertainty of an entity’s future cash flows. The extent to which a risk exposure is altered by such relationships might be apparent to users from the disclosures required by this Standard, but in some cases further disclosures might be useful.

IG17 In accordance with paragraph 33(c), entities disclose any change in the qualitative

information from the previous period and explain the reasons for the change. Such changes may result from changes in exposure to risk or from changes in the way those exposures are managed.

Quantitative disclosures (paragraphs 34-42 and B7-B28)

IG18 Paragraph 34 requires disclosure of quantitative data about concentrations of risk. For example, concentrations of credit risk may arise from:

(a) industry sectors. Thus, if an entity’s counterparties are concentrated in one or

more industry sectors (such as retail or wholesale), it would disclose separately exposure to risks arising from each concentration of counterparties.

(b) credit rating or other measure of credit quality. Thus, if an entity’s

counterparties are concentrated in one or more credit qualities (such as secured loans or unsecured loans) or in one or more credit ratings (such as investment grade or speculative grade), it would disclose separately exposure to risks arising from each concentration of counterparties.



(c) geographical distribution. Thus, if an entity’s counterparties are concentrated

in one or more geographical markets (such as Asia or Europe), it would disclose separately exposure to risks arising from each concentration of counterparties.

(d) a limited number of individual counterparties or groups of closely related

counterparties. Similar principles apply to identifying concentrations of other risks, including liquidity risk and market risk. For example, concentrations of liquidity risk may arise from the repayment terms of financial liabilities, sources of borrowing facilities or reliance on a particular market in which to realise liquid assets. Concentrations of foreign exchange risk may arise if an entity has a significant net open position in a single foreign currency, or aggregate net open positions in several currencies that tend to move together.

IG19 In accordance with paragraph B8, disclosure of concentrations of risk includes a

description of the shared characteristic that identifies each concentration. For example, the shared characteristic may refer to geographical distribution of counterparties by groups of countries, individual countries or regions within countries.

IG20 When quantitative information at the end of the reporting period is unrepresentative of

the entity’s exposure to risk during the period, paragraph 35 requires further disclosure. To meet this requirement, an entity might disclose the highest, lowest and average amount of risk to which it was exposed during the period. For example, if an entity typically has a large exposure to a particular currency, but at year-end unwinds the position, the entity might disclose a graph that shows the exposure at various times during the period, or disclose the highest, lowest and average exposures.

Credit risk (paragraphs 35A–36, B8A–B10)

IG20A The following examples illustrate possible ways in which an entity might provide the disclosures required by paragraphs 35A–35N of IFRS 7. However, these illustrations do not address all possible ways of applying the disclosure requirements.

Illustrating the application of paragraphs 35H and 35I

IG20B The following example illustrates one way of providing information about the changes in the loss allowance and the significant changes in the gross carrying amount of financial assets during the period that contributed to changes in the loss allowance as required by paragraphs 35H–35I. This example does not illustrate the requirements for financial assets that are purchased or originated credit-impaired.



Mortgage loans–loss allowance 12-month

expected

credit

losses

Lifetime

expected

credit losses

(collectively

assessed)

Lifetime

expected

credit losses

(individually

assessed)

Credit-impaired

financial assets

(lifetime

expected credit

losses)

CU’000

Loss allowance as at 1 January X X X X

Changes due to financial instruments recognised as at 1 January:

- Transfer to lifetime expected credit losses (X) X X –

- Transfer to credit-impaired financial assets (X) – (X) X

- Transfer to 12-month expected credit losses X (X) (X) –

- Financial assets that have been derecognised during the period (X) (X) (X) (X)

New financial assets originated or purchased X – – –

Write-offs – – (X) (X)

Changes in models/risk parameters X X X X

Foreign exchange and other movements X X X X

Loss allowance as at 31 December X X X X

Significant changes in the gross carrying amount of mortgage loans that contributed to changes in the loss allowance were:

• The acquisition of the ABC prime mortgage portfolio increased the residential mortgage book by x per cent, with a corresponding increase in the loss allowance measured on a 12-month basis.

• The write off of the CUXX DEF portfolio following the collapse of the local market reduced the loss allowance for financial assets with objective evidence of impairment by CUX.

• The expected increase in unemployment in Region X caused a net increase in financial assets whose loss allowance is equal to lifetime expected credit losses and caused a net increase of CUX in the lifetime expected credit losses allowance.

The significant changes in the gross carrying amount of mortgage loans are further explained below:



Mortgage loans–gross

carrying amount

12-month

expected credit

losses

Lifetime

expected

credit losses

(collectively

assessed)

Lifetime

expected

credit

losses

(individually

assessed)

Credit-impaired

financial assets

(lifetime

expected credit

losses)

CU’000

Gross carrying amount as at 1 January X X X X

Individual financial assets transferred to lifetime expected credit losses (X) – X –

Individual financial assets transferred to credit-impaired financial assets (X) – (X) X

Individual financial assets transferred from credit-impaired financial assets X – X (X)

Financial assets assessed on collective basis (X) X – –

New financial assets originated or purchased X – – –

Write-offs – – (X) (X)

Financial assets that have been derecognised (X) (X) (X) (X)

Changes due to modifications that did not result in derecognition (X) – (X) (X)

Other changes X X X X

Gross carrying amount as at 31 December X X X X

Illustrating the application of paragraphs 35M and 35N

IG20C The following example illustrates some ways of providing information about an entity’s credit risk exposure and significant credit risk concentrations in accordance with paragraph 35M of IFRS 7. The number of grades used to disclose the information in accordance with paragraph 35M of IFRS 7 shall be consistent with the number that the entity uses to report internally to key management personnel for internal credit risk management purposes. However, if information about credit risk rating grades is not available without undue cost or effort and an entity uses past due information to assess whether credit risk has increased significantly since initial recognition in accordance with paragraph 5.5.11 of IFRS 9, the entity shall provide an analysis by past due status for those financial assets.



Consumer loan credit risk exposure by internal rating grades

20XX Consumer—credit card Consumer—automotive

CU’000 Gross carrying amount Gross carrying amount

Lifetime 12-month Lifetime 12-month

Internal Grade 1–2 X X X X



Internal Grade 7 X X X X

Total X X X X

Corporate loan credit risk profile by external rating grades

20XX Corporate—equipment Corporate—construction



AAA-AA X X X X

A X X X X

BBB-BB X X X X

B X X X X

CCC-CC X X X X

C X X X X

D X X X X

Total X X X X

Corporate loan risk profile by probability of default

20XX Corporate—unsecured Corporate—secured



0.00 – 0.10 X X X X

0.11 – 0.40 X X X X

0.41 – 1.00 X X X X

1.01 – 3.00 X X X X

3.01 – 6.00 X X X X

6.01 – 11.00 X X X X

11.01 – 17.00 X X X X

17.01 – 25.00 X X X X

25.01 – 50.00 X X X X

50.01+ X X X X

Total X X X X



IG20D Entity A manufactures cars and provides financing to both dealers and end customers. Entity A discloses its dealer financing and customer financing as separate classes of financial instruments and applies the simplified approach to its trade receivables so that the loss allowance is always measured at an amount equal to lifetime expected credit losses. The following table illustrates the use of a provision matrix as a risk profile disclosure under the simplified approach:

20XX

CU’000

Trade receivables days past due

Dealer financing

Expected credit loss rate Estimated total gross carrying amount at default

Current

0.10% CU20,777

More than 30 days

2%

CU1,416

More than 60 days

5%

CU673

More than 90 days

13%

CU235

Total

CU23,101

Lifetime expected credit losses—dealer financing

CU21 CU28 CU34 CU31 CU114

Customer financing

Expected credit loss rate Estimated total gross carrying amount at default

0.20% CU19,222

3% CU2,010

8% CU301

15% CU154

CU21,687

Lifetime expected credit losses— customer financing

CU38 CU60 CU24 CU23 CU145

Credit risk (paragraphs 36-38, B9 and B10)

IG21 Paragraph 36 requires an entity to disclose information about its exposure to credit

risk by class of financial instrument. Financial instruments in the same class share economic characteristics with respect to the risk being disclosed (in this case, credit risk). For example, an entity might determine that residential mortgages, unsecured consumer loans, and commercial loans each have different economic characteristics.

Collateral and other credit enhancements pledged (paragraph 36(b))

IG22 Paragraph 36(b) requires an entity to describe collateral available as security for assets it holds and other credit enhancements obtained. An entity might meet this requirement by disclosing:

(a) the policies and processes for valuing and managing collateral and other

credit enhancements obtained; (b) a description of the main types of collateral and other credit enhancements

(examples of the latter being guarantees, credit derivatives, and netting agreements that do not qualify for offset in accordance with IAS 32);

(c) the main types of counterparties to collateral and other credit enhancements

and their creditworthiness; and



(d) information about risk concentrations within the collateral or other credit

enhancements. Credit quality (paragraph 36(c))

IG23- [Deleted]Paragraph 36(c) requires an entity to disclose information about the credit IG31 quality of financial assets with credit risk that are neither past due nor impaired. In doing so, an entity might disclose the following information:

(a) an analysis of credit exposures using an external or internal credit grading system;

(b) the nature of the counterparty;

(c) historical information about counterparty default rates; and (d) any other information used to assess credit quality.

IG24 When the entity considers external ratings when managing and monitoring credit

quality, the entity might disclose information about:

(a) the amounts of credit exposures for each external credit grade; (b) the rating agencies used; (c) the amount of an entity’s rated and unrated credit exposures; and (d) the relationship between internal and external ratings.

IG25 When the entity considers internal credit ratings when managing and monitoring credit quality, the entity might disclose information about:

(a) the internal credit ratings process; (b) the amounts of credit exposures for each internal credit grade; and (c) the relationship between internal and external ratings. Financial assets that are either past due or impaired (paragraph 37)

IG26 A financial asset is past due when the counterparty has failed to make a payment when contractually due. As an example, an entity enters into a lending agreement that requires interest to be paid every month. On the first day of the next month, if interest has not been paid, the loan is past due. Past due does not mean that a counterparty will never pay, but it can trigger various actions such as renegotiation, enforcement of covenants, or legal proceedings.

IG27 When the terms and conditions of financial assets that have been classified as past

due are renegotiated, the terms and conditions of the new contractual arrangement apply in determining whether the financial asset remains past due.

IG28 Paragraph 37(a) requires an analysis by class of the age of financial assets that are

past due but not impaired. An entity uses its judgement to determine an appropriate number of time bands. For example, an entity might determine that the following time bands are appropriate:

(a) not more than three months;

(b) more than three months and not more than six months;



(c) more than six months and not more than one year; and

(d) more than one year. IG29 Paragraph 37(b) requires an analysis of impaired financial assets by class. This

analysis might include:

(a) the carrying amount, before deducting any impairment loss; (b) the amount of any related impairment loss; and (c) the nature and fair value of collateral available and other credit enhancements

obtained.

IG30- [Deleted] IG31 Market risk (paragraphs 40-42 and B17-B28) IG32 Paragraph 40(a) requires a sensitivity analysis for each type of market risk to which

the entity is exposed. There are three types of market risk: interest rate risk, currency risk and other price risk. Other price risk may include risks such as equity price risk, commodity price risk, prepayment risk (ie the risk that one party to a financial asset will incur a financial loss because the other party repays earlier or later than expected), and residual value risk (eg a lessor of motor cars that writes residual value guarantees is exposed to residual value risk). Risk variables that are relevant to disclosing market risk include, but are not limited to:

(a) the yield curve of market interest rates. It may be necessary to consider both

parallel and non-parallel shifts in the yield curve. (b) foreign exchange rates. (c) prices of equity instruments. (d) market prices of commodities.

IG33 Paragraph 40(a) requires the sensitivity analysis to show the effect on profit or loss

and equity of reasonably possible changes in the relevant risk variable. For example, relevant risk variables might include:

(a) prevailing market interest rates, for interest-sensitive financial instruments

such as a variable-rate loan; or (b) currency rates and interest rates, for foreign currency financial instruments

such as foreign currency bonds. IG34 For interest rate risk, the sensitivity analysis might show separately the effect of a

change in market interest rates on:

(a) interest income and expense; (b) other line items of profit or loss (such as trading gains and losses); and (c) when applicable, equity.

An entity might disclose a sensitivity analysis for interest rate risk for each currency in

which the entity has material exposures to interest rate risk. IG35 Because the factors affecting market risk vary depending on the specific

circumstances of each entity, the appropriate range to be considered in providing a



sensitivity analysis of market risk varies for each entity and for each type of market risk.

IG36 The following example illustrates the application of the disclosure requirement in

paragraph 40(a):

Interest rate risk At 31 December 20X2, if interest rates at that date had been 10 basis points lower with all other variables held constant, post-tax profit for the year would have been CU1.7 million (20X1–CU2.4 million) higher, arising mainly as a result of lower interest expense on variable borrowings., and other comprehensive income would have been CU2.8 million (20X1–CU3.2 million) higher, arising mainly as a result of an increase in the fair value of fixed rate financial assets classified as available for sale. If interest rates had been 10 basis points higher, with all other variables held constant, post-tax profit would have been CU1.5 million (20X1–CU2.1 million) lower, arising mainly as a result of higher interest expense on variable borrowings., and other comprehensive income would have been CU3.0 million (20X1–CU3.4 million) lower, arising mainly as a result of a decrease in the fair value of fixed rate financial assets classified as available for sale. Profit is more sensitive to interest rate decreases than increases because of borrowings with capped interest rates. The sensitivity is lower in 20X2 than in 20X1 because of a reduction in outstanding borrowings that has occurred as the entity’s debt has matured (see note X).

(a)

Foreign currency exchange rate risk At 31 December 20X2, if the CU had weakened 10 per cent against the US dollar with all other variables held constant, post-tax profit for the year would have been CU2.8 million (20X1–CU6.4 million) lower, and other comprehensive income would have been CU1.2 million (20X1–CU1.1 million) higher. Conversely, if the CU had strengthened 10 per cent against the US dollar with all other variables held constant, post-tax profit would have been CU2.8 million (20X1–CU6.4 million) higher, and other comprehensive income would have been CU1.2 million (20X1–CU1.1 million) lower. The lower foreign currency exchange rate sensitivity in profit in 20X2 compared with 20X1 is attributable to a reduction in foreign currency denominated debt. Equity is more sensitive in 20X2 than in 20X1 because of the increased use of hedges of foreign currency purchases, offset by the reduction in foreign currency debt. (a) Paragraph 39(a) requires disclosure of a maturity analysis of liabilities.

Other market risk disclosures (paragraph 42)

IG37 Paragraph 42 requires the disclosure of additional information when the sensitivity analysis disclosed is unrepresentative of a risk inherent in a financial instrument. For example, this can occur when:

(a) a financial instrument contains terms and conditions whose effects are not

apparent from the sensitivity analysis, eg options that remain out of (or in) the money for the chosen change in the risk variable;

(b) financial assets are illiquid, eg when there is a low volume of transactions in

similar assets and an entity finds it difficult to find a counterparty; or (c) an entity has a large holding of a financial asset that, if sold in its entirety,

would be sold at a discount or premium to the quoted market price for a smaller holding.



IG38 In the situation in paragraph IG37(a), additional disclosure might include:

(a) the terms and conditions of the financial instrument (eg the options); (b) the effect on profit or loss if the term or condition were met (ie if the options

were exercised); and (c) a description of how the risk is hedged.

For example, an entity may acquire a zero-cost interest rate collar that includes an

out-of-the-money leveraged written option (eg the entity pays ten times the amount of the difference between a specified interest rate floor and the current market interest rate). The entity may regard the collar as an inexpensive economic hedge against a reasonably possible increase in interest rates. However, an unexpectedly large decrease in interest rates might trigger payments under the written option that, because of the leverage, might be significantly larger than the benefit of lower interest rates. Neither the fair value of the collar nor a sensitivity analysis based on reasonably possible changes in market variables would indicate this exposure. In this case, the entity might provide the additional information described above.

IG39 In the situation described in paragraph IG37(b), additional disclosure might include the

reasons for the lack of liquidity and how the entity hedges the risk. IG40 In the situation described in paragraph IG37(c), additional disclosure might include:

(a) the nature of the security (eg entity name);

(b) the extent of holding (eg 15 per cent of the issued shares); (c) the effect on profit or loss; and (d) how the entity hedges the risk.

Derecognition (paragraphs 42D and 42E) IG40A The following examples illustrate some possible ways to meet the quantitative

disclosure requirements in paragraphs 42D and 42E. IG40B The following examples illustrate how an entity that has adopted IFRS 9 Financial

Instruments might meet the quantitative disclosure requirements in paragraphs 42D and 42E.




Illustrating the application of paragraph 42D(d) and (e)

Financial assets at fair value

through profit or loss

Financial assets at amortised

cost

Financial assets at fair value

through other comprehensive

income

CU million CU million CU million

Trading assets

Derivatives Mortgages Consumer loans

Equity investments

Carrying amount of assets X X X X X

Carrying amount of associated liabilities (X) (X) (X) (X) (X)

For those liabilities that have recourse only to the transferred assets:

Fair value of assets X X X X X

Fair value of associated liabilities (X) (X) (X) (X) (X)

Net position X X X X X




Illustrating the application of paragraph 42E(a)–(d)

Cash outflows to repurchase

transferred (derecognised)

assets

Carrying amount of continuing involvement

in statement of financial position

Fair value of continuing involvement

Maximum exposure to

loss

CU million CU million CU million CU million

Type of continuing involvement

Financial assets at fair value through profit or

loss

Financial assets at fair value through

other compre-hensive income

Financial liabilities

at fair value

through profit or

loss

Assets Liabilities

Written put options (X) (X) (X) X

Purchased call options (X) X X X

Securities lending (X) (X)

X (X) X

Total X (X)

X (X) X

Illustrating the application of paragraph 42E(e)

Undiscounted cash flows to repurchase transferred assets

Maturity of continuing involvement CU million


Total less than 1 month

1–3 months

3–6 months

6 months –1 year

1–3 years

3–5 years

more than 5 years

Written put options X X X X X

Purchased call options X X X X X

Securities lending X X X



IG40C The following examples illustrate how an entity that has not adopted IFRS 9 might meet the quantitative disclosure requirements in paragraphs 42D and 42E.


Illustrating the application of paragraph 42D(d) and (e)

Financial assets at fair value through profit or

loss

Loans and receivables

Available-for-sale financial assets

CU million CU million CU million

Trading securities

Derivatives Mortgages Consumer loans

Equity investments

Carrying amount of assets X X X X X

Carrying amount of associated liabilities (X) (X) (X) (X) (X)

For those liabilities that have recourse only to the transferred assets:

Fair value of assets X X X X X

Fair value of associated liabilities (X) (X) (X) (X) (X)

Net position X X X X X




Illustrating the application of paragraph 42E(a)–(d)

Cash outflows to repurchase

transferred (derecognised)

assets

Carrying amount of continuing involvement in statement of

financial position

Fair value of continuing

involvement

Maximum exposure

to loss

CU million CU million CU million CU million


Held for trading

Available- for-sale financial assets

Financial liabilities

at fair value

through profit or

loss

Assets Liabilities

Written put options (X) (X) (X) X

Purchased call options (X) X X X

Securities lending (X) X (X) X (X) X

Total X X (X) X (X) X

Illustrating the application of paragraph 42E(e)

Undiscounted cash flows to repurchase transferred assets

Maturity of continuing involvement CU million


Total less than 1 month

1–3 months

3–6 months

6 months –1 year

1–3 years

3–5 years

more than 5 years

Written put options X X X X X

Purchased call options X X X X X

Securities lending X X X



Disclosures (paragraphs 13A–13F and B40–B53)

IG40D The following examples illustrate ways in which an entity might provide the quantitative disclosures required by paragraph 13C. However, these illustrations do not address all possible ways of applying the disclosure requirements as set out in paragraphs 13B–13E.

Background

An entity has entered into transactions subject to an enforceable master netting arrangement or similar agreement with the following counterparties. The entity has the following recognised financial assets and financial liabilities resulting from those transactions that meet the scope of the disclosure requirements in paragraph 13A.

Counterparty A:

The entity has a derivative asset (fair value of CU100 million) and a derivative liability (fair value of CU80 million) with Counterparty A that meet the offsetting criteria in paragraph 42 of IAS 32. Consequently, the gross derivative liability is set off against the gross derivative asset, resulting in the presentation of a net derivative asset of CU20 million in the entity’s statement of financial position. Cash collateral has also been received from Counterparty A for a portion of the net derivative asset (CU10 million). The cash collateral of CU10 million does not meet the offsetting criteria in paragraph 42 of IAS 32, but it can be set off against the net amount of the derivative asset and derivative liability in the case of default and insolvency or bankruptcy, in accordance with an associated collateral arrangement.

Counterparty B:

The entity has a derivative asset (fair value of CU100 million) and a derivative liability (fair value of CU80 million) with Counterparty B that do not meet the offsetting criteria in paragraph 42 of IAS 32, but which the entity has the right to set off in the case of default and insolvency or bankruptcy. Consequently, the gross amount of the derivative asset (CU100 million) and the gross amount of the derivative liability (CU80 million) are presented separately in the entity’s statement of financial position. Cash collateral has also been received from Counterparty B for the net amount of the derivative asset and derivative liability (CU20 million). The cash collateral of CU20 million does not meet the offsetting criteria in paragraph 42 of IAS 32, but it can be set off against the net amount of the derivative asset and derivative liability in the case of default and insolvency or bankruptcy, in accordance with an associated collateral arrangement.

continued...



...continued

Counterparty C:

The entity has entered into a sale and repurchase agreement with Counterparty C that is accounted for as a collateralised borrowing. The carrying amount of the financial assets (bonds) used as collateral and posted by the entity for the transaction is CU79 million and their fair value is CU85 million. The carrying amount of the collateralised borrowing (repo payable) is CU80 million.

The entity has also entered into a reverse sale and repurchase agreement with Counterparty C that is accounted for as a collateralised lending. The fair value of the financial assets (bonds) received as collateral (and not recognised in the entity’s statement of financial position) is CU105 million. The carrying amount of the collateralised lending (reverse repo receivable) is CU90 million.

The transactions are subject to a global master repurchase agreement with a right of set-off only in default and insolvency or bankruptcy and therefore do not meet the offsetting criteria in paragraph 42 of IAS 32. Consequently, the related repo payable and repo receivable are presented separately in the entity’s statement of financial position.

Illustrating the application of paragraph 13C(a)–(e) by type of financial instrument

Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements

CU million

As at 31 December 20XX

(a) (b) (c)=(a)-(b) (d) (e)=(c)-(d)

Related amounts not set off in the statement of

financial position

Gross amounts of recognised

financial assets


financial liabilities set

off in the statement of

financial position

Net amounts of

financial assets

presented in the

statement of financial

position

(d)(i), (d)(ii)

Financial instruments

(d)(ii)

Cash collateral received

Net amount

Description

Derivatives 200 (80) 120 (80) (30) 10

Reverse repurchase, securities borrowing and similar agreements 90 - 90 (90) - -

Other financial instruments - - - - - -

Total 290 (80) 210 (170) (30) 10



Financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements

CU million


(a) (b) (c)=(a)-(b) (d) (e)=(c)-(d)

Related amounts not set off in the statement of

financial position


financial assets


financial assets set off in the statement


Net amounts of

financial liabilities

presented in the

statement of financial position

(d)(i), (d)(ii)


(d)(ii)

Cash collateral pledged

Net amount

Description

Derivatives 160 (80) 80 (80) - -

Repurchase, securities lending and similar agreements 80 - 80 (80) - -

Other financial instruments - - - - - -

Total 240 (80) 160 (160) - -



Illustrating the application of paragraph 13C(a)–(c) by type of financial instrument and paragraph 13C(c)–(e) by counterparty

Financial assets subject to offsetting, enforceable master netting arrangements and similar agreements

CU million

As at 31 December 20XX (a) (b) (c)=(a)-(b)


financial assets


financial liabilities set off in the statement of

financial position

Net amounts of financial assets presented in the


Description

Derivatives 200 (80) 120

Reverse repurchase, securities borrowing and similar agreements 90 - 90

Other financial instruments - - -

Total 290 (80) 210

Net financial assets subject to enforceable master netting arrangements and similar agreements, by counterparty

CU million


(c) (d) (e)=(c)-(d)

Related amounts not set off in the statement of financial position

Net amounts of financial assets

presented in the statement


(d)(i), (d)(ii)


(d)(ii)

Cash collateral received

Net amount

Counterparty A 20 - (10) 10

Counterparty B 100 (80) (20) -

Counterparty C 90 (90) - -

Other - - - -

Total 210 (170) (30) 10



Financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements

CU million

As at 31 December 20XX (a) (b) (c)=(a)-(b)


financial liabilities


financial assets set off in the statement of

financial position

Net amounts of financial liabilities presented in the


Description

Derivatives 160 (80) 80

Repurchase, securities lending and similar agreements 80 - 80

Other financial instruments - - -

Total 240 (80) 160

Net financial liabilities subject to enforceable master netting arrangements and similar agreements, by counterparty

CU million


(c) (d) (e)=(c)-(d)

Related amounts not set off in the statement of financial position

Net amounts of financial liabilities

presented in the statement


(d)(i), (d)(ii)


(d)(ii)

Cash collateral pledged

Net amount

Counterparty A - - - -

Counterparty B 80 (80) - -

Counterparty C 80 (80) - -

Other - - - -

Total 160 (160) - -

Transition from IAS 39 to IFRS 9 (paragraphs 42K-42O)

IG40E The following illustration is an example of one possible way to meet the quantitative disclosure requirements in paragraphs 42K–42O of IFRS 7 at the date of initial application of IFRS 9. However, this illustration does not address all possible ways of applying the disclosure requirements of this IFRS.



Reconciliation of statement of financial position balances from IAS 39 to IFRS 9 at 1 January 2018

Financial assets (i) (ii) (iii) (iv) = (i)

+ (ii) +

(iii)

(v) = (iii)

IAS 39

carrying

amount 31

December

2017 (1)

Reclassifications Remeasurements IFRS 9

carrying

amount

1

January

2018

Retained

earnings

effect on

1

January

2018 (2),

(3)

Fair value through profit or loss

Additions:

From available for sale (IAS 39)

(a)

(c)

From amortised cost (IAS 39) – required reclassification

(b)

From amortised cost (IAS 39) – fair value option elected at 1 January 2018

Subtractions:

To amortised cost (IFRS 9)

To fair value through other comprehensive income – debt instruments (IFRS 9)

To fair value through other comprehensive income – equity instruments (IFRS 9)

Total change to fair value through profit or loss

Fair value through other comprehensive income

Additions – debt instruments:


(g)

From amortised cost (IAS 39)

(h)

continued...





+ (ii) +

(iii)

(v) = (iii)

IAS 39

carrying

amount 31

December

2017 (1)


carrying

amount

1

January

2018

Retained

earnings

effect on

1

January

2018 (2),

(3)

From fair value through profit or loss (IAS 39) – required reclassification based on classification criteria

(i)

From fair value through profit or loss (fair value option under IAS 39) – fair value option criteria not met at 1 January 2018

(j)

From fair value through profit or loss (IAS 39) – fair value option revoked at 1 January 2018 by choice

(k)

Additions – equity instruments:

From available-for-sale (IAS 39)

From fair value through profit or loss (fair value option under IAS 39)–fair value through other comprehensive income elected at 1 January 2018

From cost (IAS 39)

Subtractions – debt and equity instruments:

continued...





+ (ii) +

(iii)

(v) = (iii)

IAS 39

carrying

amount 31

December

2017 (1)


carrying

amount

1

January

2018

Retained

earnings

effect on

1

January

2018 (2),

(3)

Available for sale (IAS 39) to fair value through profit or loss (IFRS 9) – required reclassification based on classification criteria

(d)

Available for sale (IAS 39) to fair value through profit or loss (IFRS 9) – fair value option elected at 1 January 2018

Available for sale (IAS 39) to amortised cost (IFRS 9) (e)

Total change to fair value through other comprehensive income

Amortised cost

Additions:


(f)

From fair value through profit or loss (IAS 39) – required reclassification

From fair value through profit or loss (fair value option under IAS 39) – fair value option criteria not met at 1 January 2018

From fair value through profit or loss (IAS 39) – fair value option revoked at 1 January 2018 by choice

continued...





+ (ii) +

(iii)

(v) = (iii)

IAS 39

carrying

amount 31

December

2017 (1)


carrying

amount

1

January

2018

Retained

earnings

effect on

1

January

2018 (2),

(3)

Subtractions:

To fair value through other comprehensive income (IFRS 9)

(l)

To fair value through profit or loss (IFRS 9) – required reclassification based on classification criteria

To fair value through profit or loss (IFRS 9)–fair value option elected at 1 January 2018

Total change to amortised cost

Total financial asset balances, reclassifications and remeasurements at 1 January 2018 (i) Total (ii) = 0 (iii)

(iv) = (i) + (ii) + (iii)

1 Includes the effect of reclassifying hybrid instruments that were bifurcated under IAS 39 with host contract components of (a), which had associated embedded derivatives with a fair value of X at 31 December 2017, and (b), which had associated embedded derivatives with a fair value of Y at 31 December 2017.

2 Includes (c), (d), (e) and (f), which are amounts reclassified from other comprehensive income to retained earnings at the date of initial application.

3 Includes (g), (h), (i), (j), (k) and (l), which are amounts reclassified from retained earnings to accumulated other comprehensive income at the date of initial application.

Transition (paragraph 44)

IG41 The following table summarises the effect of the exemption from presenting

comparative accounting and risk disclosures for accounting periods beginning before 1 January 2006, before 1 January 2007, and on or after 1 January 2007. In this table:

(a) a first-time adopter is an entity preparing its first IFRS financial statements

(see IFRS 1 First-time Adoption of International Financial Reporting Standards).



(b) an existing IFRS user is an entity preparing its second or subsequent IFRS

financial statements.

Accounting disclosures (paragraphs 7-30)

Risk disclosures (paragraphs 31-42)

Accounting periods beginning before 1 January 2006

First-time adopter not applying IFRS 7 early

Applies IAS 32 but exempt from providing IAS 32 comparative information

Applies IAS 32 but exempt from providing IAS 32 comparative information

First-time adopter applying IFRS 7 early

Exempt from presenting IFRS 7 comparative information


Existing IFRS user not applying IFRS 7 early

Applies IAS 32. Provides full IAS 32 comparative information


Existing IFRS user applying IFRS 7 early

Provides full IFRS 7 comparative information


(a)

continued …



Accounting periods beginning on or after 1 January 2006 and before 1 January 2007

First-time adopter not applying IFRS 7 early



First-time adopter applying IFRS 7 early



Existing IFRS user not applying IFRS 7 early



Existing IFRS user applying IFRS 7 early



Accounting periods beginning on or after 1 January 2007 (mandatory application of IFRS 7)

First-time adopter



Existing IFRS user



(a) See paragraph 44 of IFRS 7



APPENDIX A Amendments to guidance on other IFRSs

This appendix contains amendments to guidance on IFRSs other than IFRS 4 that are necessary in order to ensure consistency with IFRS 7. Amendments to the Guidance on Implementing IFRS 4 will be published at a later date. In the amended paragraphs, new text is underlined and deleted text is struck through.

* * * The amendments contained in this appendix when this Implementation Guidance was issued have been incorporated into the relevant Implementation Guidance.

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